Even a ‘non-binding’ letter of intent may lead to liability – the theory (at last, but strictly) applied by the Antwerp Court of Appeal

Acquisition agreements are often preceded by some preliminary agreement (also called a declaration of intent; letter of intent; memorandum of understanding; agreement in principle, etc.) that not seldom is considered as non-binding by the parties. Such initial document aims at describing the status of the negotiations, the agreed principles, and any further steps required to arrive at a final acquisition agreement.

Parties who do not yet wish to enter into a binding agreement must make an explicit statement to that effect in the preliminary agreement. If they fail to do so and then reach an agreement on the subject of the purchase/sale and the price, they create a legally binding contract of transfer. The name of the document (e.g. letter of intent) does not play a decisive role in whether or not it is binding upon parties. The court will judge the nature of the obligation by the content of the agreement, the actual circumstances and the parties’ conduct.

Even if the letter of intent contains an explicit provision that it does not constitute a binding obligation to purchase or sell, it still creates an obligation for each of the parties to continue negotiations in good faith based on the agreed principles (article 1134, paragraph 3 of the Belgian Civil Code). Failure of any of the parties to do so (e.g. they refuse to cooperate for the purpose of delaying the negotiations, reconsider an earlier agreed principle, or stop the negotiations without any clear reason) will create a contractual fault, which will result in liability.

In practice, however, courts are reluctant to establish unlawful termination of negotiations or bad faith in performing the letter of intent.

Nevertheless, the Antwerp Court of Appeal took a different view in a recently published judgment (Antwerp, 17 October 2011, Rechtskundig Weekblad  2013-14, no. 17, 655) [Antwerp, 17 October 2011] in which the doctrine of article 1134, par. 3 of the Belgian Civil Code, more particularly parties’ obligation to perform an agreement in good faith, was applied to a letter of intent. In the case in question, the buyer had assumed that an important lease contract was open for renewal for a period of nine years shortly after the takeover. Contacts with the lessee revealed that the lease contract could be renewed only for a period of two years. In view of the consequential loss of rental income the buyer then decided not to proceed with the share purchase. The Court of First Instance found that a letter of intent is a voluntary statement that does not create obligations for the parties. The Court of Appeal rejected this point of view, ruling that the buyer was in breach of contract. Remarkably, the Court of Appeal found that if the secured rental income had formed a crucial condition for the takeover, the party in question undoubtedly would have included it in the letter of intent. Failure to include such a condition implied that it could not be taken as a decisive reason for not honoring the letter of intent.

By assuming that parties should include all the essential conditions in their letter of intent and by assessing the performance in good faith thereof, the Court of Appeal adopted a strict interpretation of the doctrine of the performance in good faith.

This judgment forces parties – even more than before – to proceed with utmost caution when preparing a letter of intent.

Anneleen Steeno, intui law firm