Is a letter of intent to buy a business binding?

Whether a letter of intent to buy a business is binding depends on its wording. BDC, the Business Development Bank of Canada, says the document is of a legal nature, but it is not intended to be fully binding, unless otherwise expressly stipulated. The label on the page does not settle it. The clauses do, and so does the law of the province where the deal sits.

The parts that can bind

BDC quotes its senior counsel, Pierre Marquis, saying that, where so provided, the letter of intent will create binding obligations on one party or the other, particularly with regard to confidentiality and exclusivity. BDC says a letter of intent can, if needed, assure the buyer a period of exclusivity during which to conduct the negotiations. Check which clauses are labelled binding and for how long. The related answer what is an exclusivity clause in a letter of intent goes through that clause.

Legal weight without a duty to close

BDC notes that a letter of intent is not intended to create a contractual obligation to close a deal, but that does not preclude it from having legal weight. It also quotes Mr. Marquis saying a detailed letter can be hard to tell apart from a formal purchase offer, which can lead to a dispute if one party withdraws. BDC advises contacting a lawyer specialized in transactional law early and avoiding an online template.

What Quebec’s Civil Code says

In Quebec, the Civil Code says a contract is formed by the sole exchange of consents between persons having capacity to contract, unless the law requires a particular form or the parties subject formation to a solemn form. Éducaloi says most contracts do not have to be in writing, so a verbal agreement or an email exchange can be enough, though certain contracts must be in writing. The Code also says parties must conduct themselves in good faith both when an obligation arises and when it is performed or extinguished. It provides that a contract made in violation of a promise to contract may be set up against the promise’s beneficiary, without affecting the beneficiary’s remedy for damages against the promisor and anyone who contracted with the promisor in bad faith. Other provinces apply their own law, so ask a lawyer where yours stands.

What to do before signing

Mark each clause as binding or non-binding in plain words. Compare the draft against your purchase offer in letter of intent vs purchase agreement.