(The Dangers of) Letters of Intent

Introduction

In the relatively recent US case of Energy Transfer Partners LP v. Enterprise Products Partners LP (EPD), DC-11-12667, District Court, Dallas County, Texas (Dallas) (the “Enterprise Case”), the jury found Enterprise Products Partners LP (“Enterprise”) to be liable to, amongst others, pay to Energy Transfer Partners LP (“Energy”) a flabbergasting US$  319 million in actual damages due to a breach by it of the duty of loyalty related to an aborted pipeline “joint-venture” between the two parties. The jury found that a statutory partnership existed between the two pipeline giants despite the absence of a definitive agreement and the presence of substantial written disclaimers and waivers in the nonbinding letter of intent and related agreements. Enterprise is currently appealing the jury’s finding.

Although this is a US case, it nevertheless lends itself brilliantly to demonstrate the dangers inherent in all and any (purportedly non-binding) letters of intent – popular written instruments widely used in all kinds of business transactions today.

What is a Letter of Intent?

Generally spoken, a Letter of Intent (“LoI”) (sometimes also referred to as ‘memorandum of understanding’ or ‘term sheet’) may be described as a document outlining an agreement between two or more parties before the agreement is finalised. Such agreements may range from asset and share purchase agreements to joint-venture and lease agreements.

LoIs resemble written contracts, but are usually not binding on the parties in their entirety. Many LoIs, however, contain provisions that are binding, such as costs, applicable law and jurisdiction provisions, as well as non-disclosure agreements.
The most common purposes of LoIs are to clarify the key points of a transaction for the benefit of the parties, to declare officially that the parties are negotiating, and to provide safeguards for the event that a deal should collapse during negotiations. LoIs usually signify a genuine interest by the involved parties in reaching final agreement subject to the conduct of a due diligence, the provision of additional information, and / or the fulfilment of certain conditions.

If carefully negotiated and drafted, a LoI may thus benefit and protect the parties to a proposed transaction. If not, however, it may spell disaster, such as happened to Enterprise in the Enterprise Case, given that even (certain provisions of) an apparently non-binding LoI may sometimes be interpreted by a court of law (or a jury, as the case may be) as being binding on the parties to it.

Dos and Don’ts in Drafting LoIs

The language used in writing LoIs is thus of vital importance, and determines whether it is only an expression of intent or an enforceable undertaking. Here are a number of pointers for drafting LoIs, and ensuring that same remain non-binding to the extent required:

1.    Draw up a ‘hybrid’ document with a clear separation between “binding” and “non-binding” portions of the LoI.

The parties should be very clear as to which terms in the LoI are binding and which are not: “Non-binding” portions of a LoI should include standard deal points such as price, quantity, timing, etc. The “binding” section of the LoI should include standard provisions such as costs, exclusivity (“stand-still” or “no-shop” provisions), applicable law and ju-risdiction provisions, as well as non-disclosure agreements, and / or covenants to negotiate in good faith.

2.    Use clear, unequivocal and express language, whether in respect of “binding” or “non-binding” clauses.

The question should be asked at all times and stages during the drafting of a LoI, whether it is clearly apparent from same, what provisions are meant to be binding or non-binding on the parties (as the case may be), and whether this is clearly evident from the language of the document.

3.    In the Enterprise case, the involved parties issued joint press releases and jointly solic-ited carriers for the proposed pipeline that was the subject of the alleged joint venture. In the eyes of the jury these public actions appear to have overruled what was otherwise a tightly drafted “non-binding” letter of intent from which the opposite appeared, given that conduct is a critical piece of evidence a jury will consider when determining whether a party intended to be bound by a LoI.
 
The lesson to be learnt from this for all purposes and intents (but particularly when a LoI is concluded with a US party) is that, apart from what may or may not be stated in a LoI, the actual conduct of the parties should and needs to be carefully evaluated; in the present case it should under no circumstances have been publicly stated that a part-nership or joint venture exists.

4.    Lastly, at each stage of evaluation of a proposed transaction, it may be helpful to reiterate in writing with the counterparty the nonbinding, non-partnership nature of the relationship.

Comment

While at least some of the aforestated points may seem trivial (and prior to the jury finding in the Enterprise Case may have seemed unnecessary in the US), the devil is undoubtedly in the detail. In the excitement of a prospective business deal, parties may be eager to press forward as fast as possible. However, careful drafting of a LoI and a little restraint, such as occasionally reiterating the non-partnership relationship of the parties to a LoI, could offer valuable legal protection both in the US and otherwere in the case that negotiations may turn sour.