Wednesday May 11 2022
Is a Justification Necessary to Withdraw Yourself From a Signed Letter of Intent (hereinafter “LOI”) ?
What is a Letter of intent?
Firstly, a letter of intent usually comes into play whenever one wishes to acquire a company’s shares or assets. Essentially, this document states the party’s intention to buy those shares or assets and acts as an agreement of negotiation between parties regarding the modalities of the purchase. With that being said, it is important to understand the legal implications behind the act of signing an LOI.
If you do not intend on following through with the LOI that you previously signed, there are some things you need to know. Indeed, even if the letter of intent is “non-binding,” meaning that the document specifically mentions that the framework contract does not represent an obligation to purchase, it still imposes some obligations.
Recent case law
As a matter of fact, in 2020, this issue was considered by the Superior Court of Québec in Beauregard v. Boulanger. In this instance, the Beauregard brothers signed a letter of intent with the Boulanger family to acquire their business. This letter established the basis for future discussions as being "without any obligation on the part of the parties." To that effect, the LOI read as follows:
"[...] the concepts set forth in this Letter of Intent are not binding on the parties and are merely intended to set the stage for our discussions to complete the purchase of the Shares (the "Transaction") through the Final Agreements to be negotiated between us."
Unfortunately, the Beauregard brothers filed a lawsuit against the other party, alleging that they did not negotiate in good faith and that the termination of the sale process was not justified. To this end, they claimed $3,000,000 in damages.
In its analysis of the question of a contractual or extra-contractual fault, the court confirmed that even in the presence of a non-binding LOI, the obligation of good faith remains. In other words, the parties are obliged to negotiate and cooperate in order to make the preliminary steps fruitful in view of a potential sale. Logically, it is understood that a certain obligation is imposed not to break off the negotiation period without justification.
More precisely, in an earlier case, the Superior Court stated that it is possible to stop negotiations, but it is necessary that the exercise of that right is not abused. We can understand that the “LOI” cannot be terminated without justification when trust to conclude the sale has been established in the parties.
In the case of Beauregard v. Boulanger, the court found that the defendants were acting in good faith and were entitled to terminate negotiations.
Conclusion: Is a justification necessary?
Considering all the facts enumerated therein, it can be concluded that it is possible for you to withdraw from a letter of intent, provided that negotiations were conducted in good faith and were still bound to fail.
Me Emmanuel Kouzelis
In collaboration with Émilie Habel
Alepin Gauthier Avocats inc.
This text contains legal information of a general nature and should not replace legal advice with a lawyer or notary who will take into account the particularities of your situation.