Under California law, letters of intent are problematic and should be signed only after careful review and counsel from an experienced San Diego corporate attorney. Businesses often use a letter of intent as a method of listing issues of agreement before a formal contract is drafted and signed. A letter of intent can be seen as a checklist of sorts.

However, letters of intent are legally risky in California if not drafted properly. There is a risk that the letter of intent will be considered a binding contract and there is also a risk of litigation over a letter of intent. A recent unpublished opinion in Denier v. Sotheby’s International Realty, Inc., Case No. H045067 (Cal. App. 6th Dist. April 18, 2019) suggests two important legal lessons:

• Avoid any language committing the parties to “negotiate in good faith” and
• Make sure there is language in the letter of intent allowing for the termination of negotiations “for any reason and without cause”

The reason for avoiding the first is to avoid litigation. In the Denier case, the “negotiate in good faith” language was the basis for the plaintiff’s lawsuit. The case involved a commercial lease for property owned by Denier. The parties signed a letter of intent, but eventually, Sotheby’s backed out of the deal and ended the negotiations. Denier sued claiming that Sotheby’s breached its agreement to “negotiate in good faith.” The trial court dismissed the case because of the language allowing termination and the Court of Appeals affirmed. However, Sotheby’s was still forced to litigate the issue. Had the letter of intent omitted the “negotiate in good faith” language, Sotheby’s might have avoided an expensive lawsuit.

The reason letters of intent are legally problematic here in the Golden State is because of a case called Copeland v. Baskin Robbins USA, 96 Cal.App.4th 1261 (Cal. App. 2nd Dist. 2002). The case has caused significant problems over the years. In that case, the parties signed a letter of intent with respect to the sale of an ice cream manufacturing plant. The sale of the plant was conditioned on the parties also entering into a separate “co-packing agreement” whereby Baskin Robbins would buy ice cream produced by Copeland at the plant. A letter of intent was signed, but eventually Baskin Robbins backed out of the negotiations and the whole deal fell through.

Copeland sued Baskin Robbins for breach of the letter of intent. Baskin Robbins argued that the letter agreement was not enforceable since various essential terms had not been agreed to (such as the price to be paid for the various quantities of ice cream to be purchased). The Court of Appeals agreed that the letter of intent was not a contract, but — amazingly — the Court of Appeals still held that the letter of intent was an enforceable contract. Specifically, the court held that the parties had entered into a binding agreement to negotiate and to negotiate in “good faith.” It is recommended that the letter of intent specifically state that the letter of intent is not a binding contract and that no binding contract will come into being until the terms of the letter of intent are set out in a formal contract to be drafted.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard of San Diego Corporate Law. To schedule a consultation, contact Mr. Leonard via email or by calling (858) 483-9200. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal.

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