How binding is a clause in a letter of intent stating that rights and obligations only arise once a signed agreement has been concluded? Not always binding, as it turns out.
A practical example
Two companies enter into a partnership. They want to jointly market a new product. They lay down a number of principles for this partnership in a letter of intent. To avoid any misunderstanding about the status of their (legal) relationship, the parties agree in the letter of intent in so many words that they cannot derive any rights from the letter of intent. Furthermore, the letter of intent states that it does not constitute an agreement. And finally, the parties stipulate in the letter of intent that rights will only arise after an agreement has been signed between the parties in which agreement has been reached on essential elements. It seems that all of this leaves nothing to be desired in terms of clarity.
Start of implementation
The parties then begin to implement the proposed collaboration even though no agreement has been signed. One party (the supplier) also invoices the other party (the customer) for work already carried out and services provided. These invoices remain unpaid. After a while, problems arise, after which the buyer extrajudicially dissolves the agreement, if such an agreement exists.
Claim
The supplier does not accept this dissolution and files a lawsuit to claim payment of the unpaid invoices, as well as compensation for damages suffered due to lost profit as a result of the premature termination of the collaboration.
The buyer’s defense is that the parties did not conclude a (written) agreement. According to the buyer, the parties got stuck in the negotiations and the buyer broke off those negotiations. The work carried out was supposedly only a pilot. The product had yet to be “proven”. If an agreement was ever reached, it was terminated by dissolution, according to the buyer.
Ignoring the requirement for a written letter of intent
The court ruled that the parties had reached agreement on the content of the documents to be signed (including a quotation and general terms and conditions issued by the supplier). The court then established that the parties had implemented the agreements made, while these were still being further developed and formalized. The parties also agreed on these agreements. In doing so, the parties tacitly ignored the requirement for a written agreement as stated in the letter of intent. The court ruled that the buyer can therefore no longer invoke this.
Work not performed without obligation
The court attaches importance to the fact that the requirement for a written quote in the letter of intent is very generally worded. For example, the letter of intent does not stipulate that if the supplier performs work prior to signing the agreement, he does so entirely at his own expense and cannot derive any right (to payment) from this. Furthermore, the court attaches value to the fact that the offer is formulated unconditionally. For example, it does not state that payment for the work only needs to be made (and exclusively) after the parties have determined that the pilot is successful.
Conclusion
The conclusion is that when parties implement agreements in the context of a cooperation that has not yet been formalized, this implementation cannot be regarded as non-committal by the buyer, (solely) by invoking a (generally formulated) requirement for a written declaration in a letter of intent. In other words, a buyer who wants to “keep his hands free” will have to explicitly stipulate this prior to the execution of agreements by a supplier.
Information
If you have any questions about this article or this topic, please contact Peter Verheijden, attorney at LVH Advocaten.
