A letter of intent is supposed to be the safe step before commitment: outline the deal, then negotiate the real contract. But California courts have enforced LOIs — in whole and in part — against parties who thought they were still just talking. Whether yours binds you depends on what it says and what you did after signing it.
Why parties use LOIs at all
In acquisitions, commercial leases, joint ventures, and major supply deals, an LOI (or term sheet, or memorandum of understanding — the label does not matter) serves real purposes: it confirms alignment on price and structure before both sides spend on diligence and drafting, it gives lenders and boards something to react to, and it can lock in ground rules like exclusivity and confidentiality for the negotiation itself. The danger is that a document detailed enough to be useful starts to look like a contract.
The test: objective intent, not labels
California courts ask whether the parties objectively manifested intent to be bound and whether the terms are definite enough to enforce. Calling the document "non-binding" helps but does not end the inquiry, and calling it a "letter of intent" proves nothing by itself. Courts look at:
- The words of the document. Does it say the parties "agree," or that they "propose to negotiate"? Does it state that no binding obligation arises until a final agreement is signed?
- Completeness of terms. An LOI covering price, structure, timing, and key covenants leaves little for a "real" contract to add.
- Conduct after signing. Beginning performance — transferring assets, starting work, taking possession, making payments — is powerful evidence that both sides treated the deal as done.
- References to a future agreement. A stated condition that the deal is "subject to" a final, formal agreement cuts against enforcement, but can be undermined by contrary language and conduct.
Terms that are meant to bind — and should
A well-drafted LOI is deliberately hybrid. The deal terms are expressly non-binding, while a short list of provisions is expressly binding:
- Exclusivity ("no-shop"). The seller agrees not to negotiate with others for a defined period. This is often the buyer's whole reason for the LOI.
- Confidentiality. Protects diligence materials and the fact of negotiations (or incorporates an existing NDA).
- Expenses. Each side bears its own costs, or a break-fee applies.
- Governing law and forum. So a dispute about the LOI itself has an answer.
List the binding provisions by section number and state that everything else creates no obligation. Vague half-measures are what generate litigation.
The duty to negotiate in good faith
California recognizes a distinctive middle category. In Copeland v. Baskin Robbins U.S.A. (2002), the Court of Appeal held that an agreement to negotiate a contract in good faith can itself be enforceable — walking away in bad faith can support a claim for the injured party's reliance damages (costs spent in the negotiation), though not the profits of the never-signed deal. If your LOI contains a covenant to "negotiate in good faith toward a final agreement," understand that it may be more than politeness. Decide whether you want that obligation, and if not, say expressly that either party may end negotiations at any time for any reason.
Practical drafting rules
- State the non-binding intent twice: once up front, once in a dedicated "binding effect" section that lists the only binding provisions.
- Say that no contract exists unless and until a final written agreement is executed by both parties.
- Keep non-binding deal terms at summary level; precision belongs in the final contract.
- Do not start performing — and document that any pre-closing cooperation is not partial performance of the deal.
- Put an expiration date on the LOI and on exclusivity.
Because the binding/non-binding line is drawn from the document's exact language plus the parties' behavior, this is a place where an hour of drafting review can reduce the risk of a year of litigation. A California business contracts attorney can help structure the LOI to provide negotiating protection while reducing the risk of accidental commitment.
Talk to a California business attorney
If you are about to sign an LOI — or the other side claims the one you signed is already a deal — get it reviewed before your next move. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
