Has a Letter of Intent binding effects, according to Brazilian Law?

 

In general there is a unanimous understanding that a Letter of Intent is not binding since, through such kind of document, the parties only aim to approach themselves and to establish certain terms for a future transaction, not yet defined.

 

As a consequence, any party has the right to go out of the negotiation without any reason and without any payment, only arguing lack of interest on the business.

 

Nevertheless, it exists presently a certain tendency among national and international authors and arbitrators, and even certain Brazilian jurisprudence, to consider a Letter of Intent or a Memo of Understanding a binding document, when certain terms and conditions may demonstrate that the parties had the concrete intention of completing a deal.

 

When the Letter of Intent provides all the agreed conditions for the future transaction, such as the term for the consummation of the acquisition; the price formula; how to treat the confidential information; the full access to the business and operations of the company to be bought, etc, etc, it is understood that a “binding agreement” exits and not a mere Letter of Intent.

 

In fact we can say that such a document is binding, once it provides the essential conditions of the future business.

 

After executing a Letter of Intent containing the above mentioned conditions, if one party goes out of transaction without a justifiable reason, it may be understood as an act in bad faith, which means, for example, to get confidential information from the other party; to stop the other party to negotiate with other companies; to avoid competition of such party (while the Letter of Intent was in full force); to cause  severe expenses to the other party; to cause bad image of the other party when going out of the negotiation, etc, which must be duly evidenced to originate liabilities.

 

 It is relevant to mention that in certain cases even some correspondences             or some acts may demonstrate that the parties had the actual intention of completing a deal, meaning that no formal signed document is required to originate liabilities.               

                

Those reasons lead to some authors and arbitrators, mainly international ones, to define such kind of Letter of Intent as an Agreement.

 

Many countries in Europe are developing theories about responsibilities deriving from Letter of Intent and we can mention Swiss law, which provides that if the parties are in agreement, regarding the essential points, the agreement is considered concluded, even if there are still some other points under future negotiation.

 

This theory is the prevailing orientation among international arbitrators and law professors and it is equally the more frequently applicable in Brazil nowadays.

In consequence we can not simply say that a Letter of Intent or a Memo of Understanding is not binding, under Brazilian Law.

 

It is important to recognize that the parties should have the right and the liberty of negotiating and of executing agreements, which are essential principles in the market economy. The right to go out of a negotiation exists, when it is no more interesting to one party, but always within certain limits. It means that it is possible for one party to terminate such kind of deal when the document is really a simple Letter of Intent or when justifiable and serious reasons exist, or if the Letter of Intent or Memo of Understanding contains a resolutory condition.

 

Otherwise, the party which goes out of a deal may be liable for losses and damages suffered by the other party.

 

Brazilian Law provides that any losses and damages must be duly evidenced by the party who claims for them and, in general, the base of such indemnity are the expenses incurred during the period of negotiations and eventually the lost opportunities of other deals. Moral damages are also possible.

 

In consideration to the above, we can say that a Letter of Intent must be deeply analyzed and very well worded, before being executed by any party, in order to avoid unnecessary risks, including risks of litigation, if the parties do not want to execute a binding Letter of Intent.

 

But one can always use “the only form of Letter of Intent ever used” by Peter Siviglia (Sharfman, Shanman, Poret & Siviglia, P.C.- New York, New York), published in his book Commercial Agreements – 1993 – Lawyers Cooperative Publishing:

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”That’s right. I never use a Letter of Intent. Even though they contain provisions loudly and carefully declaring that they are not agreements and that they create no obligations, they are invitations to litigation.”

 

Mr. Siviglia is absolutely right, as we may conclude from the above considerations! 

 

 

 

 

 

Sueli Avelar Fonseca

Nehring & Associados