A Letter of Intent (LOI) is a document in which parties set out the main outlines of an intended contract. In our practice, we see Dutch entrepreneurs signing without realizing the legal status of the text. Some provisions turn out to be binding, others not. The Dutch Supreme Court has developed extensive case law on this matter. Anyone who views the LOI as a non-binding exploration may unexpectedly become liable for breaking off negotiations.
What is the legal problem?
An LOI sets out the main commercial outlines. Some components, such as confidentiality, exclusivity, choice of law, and cost allocation, are often intended to be binding. Others, such as price and volume, usually are not. Lack of clarity regarding this leads to conflicts over whether a contract already exists. In advanced negotiations, breaking off can create liability. Internationally, the rules vary widely.
What does the law say?
Under Dutch law, the Supreme Court distinguished three phases of negotiation in the Plas/Valburg judgment (HR 18 June 1982, NJ 1983/723). In the third phase, negotiations may not be broken off without an obligation to pay damages. The CBB/JPO judgment (HR 12 August 2005, NJ 2005/467) refined this: severe restraint regarding compensation for the positive contractual interest.
Under German law, culpa in contrahendo applies (Section 311, paragraph 2 BGB). Under French law, Article 1112 of the Code Civil governs liability for breaking off in bad faith. Under English law, freedom to negotiate with limited liability prevails.
What risks do companies face?
You may unintentionally become bound to a transaction you did not yet wish to conclude. If you break off the agreement, you may become liable for advisory fees, lost profits, or even the positive contractual interest. A well-intentioned letter of intent can turn into a legal trap. Thresholds vary internationally, with unexpected outcomes in the event of a dispute. Anyone seeking certainty must explicitly mark the status of every provision.
Practical example from our practice
We advised a Dutch family business on negotiations with a German investor regarding an acquisition. The LOI contained a price margin, exclusivity for six months, and confidentiality. The family business wanted to break off the agreement after four months following a better offer. Based on culpa in contrahendo under Section 311 BGB and the advanced stage of negotiations, the German court awarded the investor compensation for advisory costs and lost profits. A non-binding clause with explicit walk-away rights would have virtually completely limited the exposure of an estimated 850,000 euros.
What can you do?
Explicitly state in the LOI which provisions are binding and which are not. Use wording such as 'subject to contract' or 'non-binding'. Limit exclusivity in terms of duration and scope. Arrange for choice of law and choice of forum to avoid surprises under foreign law. Include a break-off clause. Always have an important LOI reviewed by an international commercial law attorney before you sign. See also our article on International NDAs: what should you look out for?