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The Letter of Intent - A study from a Banking Perspective

Brandt, Annika (2003)
Department of Law
Abstract
Issuing a letter of intent often involves an initial step toward a contract, contemplating that a contract will be entered in the future. Agreements with the same meaning go under a variety of names. In the field of banking and finance a preliminary agreement is often referred to as a Commitment Letter. Traditionally, a letter of intent is a preliminary agreement without legal effects. However, some letters of intent do impose legal obligations. The difficulty is that there is no clear following regarding what legal effect a letter of intent can result in. To determine whether a letter of intent constitutes a binding and enforceable contract, its particular content and the surrounding circumstances must be examined. Courts focus on two... (More)
Issuing a letter of intent often involves an initial step toward a contract, contemplating that a contract will be entered in the future. Agreements with the same meaning go under a variety of names. In the field of banking and finance a preliminary agreement is often referred to as a Commitment Letter. Traditionally, a letter of intent is a preliminary agreement without legal effects. However, some letters of intent do impose legal obligations. The difficulty is that there is no clear following regarding what legal effect a letter of intent can result in. To determine whether a letter of intent constitutes a binding and enforceable contract, its particular content and the surrounding circumstances must be examined. Courts focus on two parameters: whether the parties intended to be bound, and if so, whether the letter is sufficiently definite to be enforced. A fully binding contract does not have to contain all the terms of the deal, but those that the parties, according to the court, considered as essential. To determine the parties' intent, courts rely on the objective appearance. By examining party behavior courts, sometimes find letters of intent that are preliminary in form to be enforceable contracts. The mere labeling of the document as a preliminary agreement or making it subject to formal agreement or board approval, is not enough to prevent an agreement from becoming legally binding. When, according to U.S. law, a complete contract is found, the parties are under a contractual obligation of good faith and need to perform according to the agreement. In case of breach of contract, the injured party would generally be awarded with expectation damages. Under current American law, the traditional rule assigns no precontractual liability, but the parties are free to back away from the deal. According to the culpa in contrahendo doctrine, which to some extent is accepted in Sweden, the parties may be under a duty to deal in good faith with each other during the negotiating stage. If they break this duty, they might face liability, often damages to the extent of the wronged party's reliance. Although not recognizing the culpa in contrahendo doctrine, American courts can impose an obligation to negotiate in good faith on the parties due to explicit or implicit provisions in the agreement. This means that, even though there is no complete contract, a court can then hold the parties bound by an obligation to negotiate in good faith to reach such. If the obligation of good faith is broken, damages, often measured by the reliance interest, can be awarded. It would also be possible, although unusual when dealing with letters of intent, to hold a party liable under various other doctrines. What constitutes a breach of a good faith obligation is also a very unclear area of the law and must be considered from case to case. Backing out of an agreement just to cut a deal with somebody else or changing already agreed conditions are possible acts in bad faith. (Less)
Please use this url to cite or link to this publication:
author
Brandt, Annika
supervisor
organization
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
Avtalsrätt, Bankrätt
language
English
id
1556475
date added to LUP
2010-03-08 15:55:19
date last changed
2010-03-08 15:55:19
@misc{1556475,
  abstract     = {Issuing a letter of intent often involves an initial step toward a contract, contemplating that a contract will be entered in the future. Agreements with the same meaning go under a variety of names. In the field of banking and finance a preliminary agreement is often referred to as a Commitment Letter. Traditionally, a letter of intent is a preliminary agreement without legal effects. However, some letters of intent do impose legal obligations. The difficulty is that there is no clear following regarding what legal effect a letter of intent can result in. To determine whether a letter of intent constitutes a binding and enforceable contract, its particular content and the surrounding circumstances must be examined. Courts focus on two parameters: whether the parties intended to be bound, and if so, whether the letter is sufficiently definite to be enforced. A fully binding contract does not have to contain all the terms of the deal, but those that the parties, according to the court, considered as essential. To determine the parties' intent, courts rely on the objective appearance. By examining party behavior courts, sometimes find letters of intent that are preliminary in form to be enforceable contracts. The mere labeling of the document as a preliminary agreement or making it subject to formal agreement or board approval, is not enough to prevent an agreement from becoming legally binding. When, according to U.S. law, a complete contract is found, the parties are under a contractual obligation of good faith and need to perform according to the agreement. In case of breach of contract, the injured party would generally be awarded with expectation damages. Under current American law, the traditional rule assigns no precontractual liability, but the parties are free to back away from the deal. According to the culpa in contrahendo doctrine, which to some extent is accepted in Sweden, the parties may be under a duty to deal in good faith with each other during the negotiating stage. If they break this duty, they might face liability, often damages to the extent of the wronged party's reliance. Although not recognizing the culpa in contrahendo doctrine, American courts can impose an obligation to negotiate in good faith on the parties due to explicit or implicit provisions in the agreement. This means that, even though there is no complete contract, a court can then hold the parties bound by an obligation to negotiate in good faith to reach such. If the obligation of good faith is broken, damages, often measured by the reliance interest, can be awarded. It would also be possible, although unusual when dealing with letters of intent, to hold a party liable under various other doctrines. What constitutes a breach of a good faith obligation is also a very unclear area of the law and must be considered from case to case. Backing out of an agreement just to cut a deal with somebody else or changing already agreed conditions are possible acts in bad faith.},
  author       = {Brandt, Annika},
  keyword      = {Avtalsrätt,Bankrätt},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Letter of Intent - A study from a Banking Perspective},
  year         = {2003},
}