When is a Letter of Intent Enforceable?

On one hand, naked agreements to agree are not enforceable. On the other hand, “the mere fact that a letter of intent explicitly contemplates future agreements does not make it unenforceable….” How can you tell the difference?

Four Categories of Letters of Intent

In Maryland, there are generally four categories of Letters of Intent which create a framework for the analysis. “A valid contract generally has been made if a letter of intent properly falls within either the third or fourth category.” Cochran v. Norkunas, 398 Md. 1, 14 (2007).

• “(1) At one extreme, the parties may say specifically that they intend not to be bound until the formal writing is executed, or one of the parties has announced to the other such an intention. 
• (2) Next, there are cases in which they clearly point out one or more specific matters on which they must yet agree before negotiations are concluded. 
• (3) There are many cases in which the parties express definite agreement on all necessary terms, and say nothing as to other relevant matters that are not essential, but that other people often include in similar contracts. 
• (4) At the opposite extreme are cases like those of the third class, with the addition that the parties expressly state that they intend their present expressions to be a binding agreement or contract; such an express statement should be conclusive on the question of their ‘intention.’” Cochran, 398 Md. at 13 (2007).

Manifestation of Mutual Assent is Required

Like any contract, enforceability of a Letter of Intent requires a “manifestation of mutual assent.”  Cochran, 398 at 14. 

Intent to be bound and definiteness of terms are required to show manifestation of mutual assent. See id.

Thus, if the parties do not intend to be bound until a final agreement is executed, there is no contract.  Similarly, “the failure of parties to agree on an essential term of a contract may indicate that the mutual assent required to make a contract is lacking.” Id.

Intent to be Bound

Courts consider five factors to determine whether parties manifested an intent to be bound:  

1. the language of the preliminary agreement
2. the existence of open terms;
3. whether partial performance has occurred;
4. the context of the negotiations;
5. the custom of such transactions, such as whether a standard form contract is widely used in similar transactions.

Courts may also look at (1) whether the agreement has few or many details; (2) whether the amount is large or small; (3) whether it is a common or unusual contract. Cochran, 398 at 14.

The most important factor is the language of the agreement. Id. at 15. The court will apply the objective theory of contracts to determine what the intent of the parties was such that “the search to determine the meaning of a contract is limited to the face of the document itself.”  Falls Garden Condominium Ass’n, Inc., v. Falls Homeowner Ass’n, Inc., 441 Md. 290, 303 (2015).

Definiteness of Terms

The terms under scrutiny have to be material terms because “a contract to be final must extend to all terms which the parties intend to introduce and material terms cannot be left for future settlement.” Falls Garden, 441 Md. 304-305. Every possible term does not need to be included, however, because “even though certain matters are expressly left to be agreed upon in the future, they may not be regarded by the parties as essential to their present agreement.” Id. at 305.

See Peoples Drug Stores v. Fenton Realty Corp., 191 Md. 489 (1948), which held that an agreement by the landowner to design a store for the tenant “in general conformity with the most recent stores” opened by the tenant elsewhere was not sufficiently specific to be specifically enforced.

Bottom line on definiteness of terms: “A letter of intent may be enforced if it is inclusive, on its face, of all definite material terms, utilizing the distinction between Corbin’s categories two and three.” Id.

Helpful Cases to Consider

These cases provide useful analyses:

• Cochran v. Norkunas, 398 Md. 1 (2007) (Not enforceable)
• Falls Garden Condominium Association v. Fall Homeowners Association, Inc., 441 MD 290 (2015) (Enforceable)
• 4900 Park Heights Avenue, LLC v. Cromwell Retail 1, LLC, 246 Md. App. 1 (2020) (Enforceable) 

Practical Tips

• Don’t assume that your term sheet at mediation or settlement negotiation session is preliminary and non-binding. Under Falls Garden, it very well could be.
• If you do not want to be bound by a term sheet and are waiting until a final, formal agreement is signed, say so in the term sheet, in clear terms.
• Similarly, if you wish the term sheet to be “the agreement”, say so. Something as simple as “The Parties agree that they intend to be bound hereby and that this Letter of Intent contains all the material terms of the parties agreement.”
• Don’t leave it to chance: Consider hammering out the final agreement at mediation or your settlement conference by bringing your computer and drafting the final agreement right there and then.
• But, if you want wiggle room, some people choose to say the following: “The parties intend to execute a more formal Agreement; however, should the parties fail to do so, this Agreement shall constitute the final agreement of the parties.”