This article posted on our partner site Mondaq.com considers the parties’ obligation to reach a definitive agreement despite a letter of intent (LOI) that states that the intent was non-binding.
An agreement to agree is generally unenforceable when: 1) all essential terms have not been decided, and 2) the parties did not intend to be legally bound. Absence of good faith in negotiations may be considered despite a non-binding LOI. Canadian courts may extend a duty of good faith (honest and reasonable performance) to LOI’s.
Parties are encouraged to take three (3) steps when drafting a non-binding LOI. First, state that parties have no contractual obligations. Second, explicitly state the non-binding nature of the LOI. Third, potentially restrict the possibility of recovering damages (e.g. exclude damages for lost profits).