Binding or non-binding nature of Letters of Intent

Businessmen, lawyers, advisers … how many times have you asked this question: What is actually stated in Letters of Intent? In a legal system, especially one such as Spanish Law, to speak of “intentions” causes some confusion.

Because of this, one of the most frequent issues in the world of M & A is whether, in effect, Letters of Intent in Spain are binding or not.

Introduction

First, it should be noted that the effectiveness of Letters of Intent frequently transcends the procedural sphere and reaches that of the Courts of Justice. In the – indisputably Anglo-Saxon/ legal world of M & A, it can be convenient to disregard the actual meaning of these documents. In doing so, operations can become frustrating, due to the different expectations that can be surmised and generated from this document.

In a contract, the words are ALWAYS important. However, in Letters of Intent, the words, the omissions, the silences and the insinuations are also extremely important.

What is Letters of Intent in Spain?

Letters of Intent are not regulated in our Law. Consequently, this has led to the freedom of the understanding of pacts between individuals. This is contemplated in article 1.255 of the Civil Code.

As with all other pre-contractual institutions, the concept and effectiveness of such a document will depend to a large extent on doctrinal and jurisprudential interpretation. In any case, it can be concluded that agreements of intentions originate in the negotiation phase of a future contract.

In short, Letters of Intent in Spain is what the client wants it to be: a binding offer, a non-binding offer, or an offer with a certain degree of linkage.

What are the functions of Letters of Intent?

There can be many functions of Letters of Intent, so we have highlighted the main ones:

• Reinforce pre-contractual liability, or culpa in contrahendo – the Latin expression meaning ‘fault in conclusion of a contract.’
• Anticipate agreements with qualified consents.
• They do not determine the elements of the contracts.
• Agree on the lack of obligation.

What is its usual content?

As for the usual content, although there are no generalities, Letters of Intent in Spain (and outside our borders) normally incorporate:

• Declaration of commitment/ intention to negotiate.
• Delimitation of the points on which to reach an agreement.
• Set out the agreements reached so far and the basis for future negotiations.
• Establish rules and a calendar for future negotiation.

Can we ensure that the Letter of Intent is not legally binding? Are there rules to escape commitment?

No. In fact, everything will depend on the proper wording of the clauses of the Charter. Also, the indeterminacy of the object, as well as the establishment of suspensive conditions and, most importantly, the inclusion of the mandatory non-binding clause.

Are any statements by the parties binding? Are there different degrees of binding?

The agreements of intentions are ‘binding agreements’ within the ‘scope of progressive formation’ of the projected contract. That is, that the Letters of Intent does not oblige the conclusion of the projected contract or originate the right to claim compliance.

However, it does constitute in itself a binding contract with its own objective, cause and consent. In addition, agreements of intentions are differentiated from the aforementioned contract, since they are atypical and complex contracts. As a result, the parties assume certain obligations by way of example: confidentiality agreements, exclusivity, or criminal clauses.

What happens if there is a breach?

As a result of this complex nature, agreements of intent can give rise to two types of responsibilities:

• Extracontractual liability. This arises due to the unjustified breaking of negotiations of the projected contract, a possible result of the nature of the preliminary treatment.
• Contractual liability. This type of liability arises from a breach of the obligations assumed in the Letters of Intent.

What does our justice system understand about Letters of Intent in Spain?

Regarding the justice system, this has seldom pronounced on documents qualified by themselves as ‘agreement of intentions.’

The Supreme Court has resolved several cases of documents that qualified as agreements of intent. These have normally focused on their effectiveness without shaping a true concept of them or putting a specific definition to them.

Jurisprudence usually gives casuistic answers. Therefore, it is very difficult to extract general rules about their effects, their characteristics or their concepts.

The most enlightening judgments about the concepts of agreement intentions may be seen in the following examples: STS of June 3, 1998. STS of April 11, 2000. STS of June 7, 2011 and STS of June 24, 2011.

First Judgment

The first resolves a litigation on a document with the following features:

1. It was a private document.
2. Its title was a commitment of intentions.
3. It established the obligation of the parties to constitute a corporation. The objective was to carry out the promotion, construction and sale of some ships from a given shipyard.
4. The structure of the shareholding was laid out with precision.
5. The administrators of the company were appointed.
6. It established the obligation of one of the parties to contribute a farm to society.
7. It clearly set out the obligation of one of the parties to finance the expenses of promotion and construction of the ships.
8. The expenses of the final project and the fees were assigned to one of the parties.
9. The destination of the profits from the sale of the industrial constructions was indicated.

In this case, the Supreme Court considered that this document was not a pre-contract, but an agreement/ Letters of Intent. Regarding the concept of Letters of Intent in Spain, the ruling would indicate that: ‘the document, in short, would be only the starting point to continue negotiating.’

From the pronouncements analyzed we reach a conclusion; Letters of Intent in Spain forms part of preliminary deals. Likewise, they are characterized, in many cases, by the lack of determination of their object.

Letters of Intent vs Definitive Contract

Together with the above, the Supreme Court differentiates the agreements of intentions from the definitive contract and the offers contained within it.

To the aforementioned Sentences of the Supreme Court, several judgements of minor jurisprudence can be added. Some of them are: the SAP of Vizcaya of October 13, 2000. SAP of Barcelona of December 10, 2002 and SAP of Alicante of April 25, 2003.

All the resolutions cited reached the same conclusion. That is that they established a concept of letter/ agreement of intentions.

Letters of Intent in Spain are pre-contractual agreements, which is different to an actual pre-contract which results from preliminary agreements. They can bring together certain agreements about the negotiation or the projected contract without constituting an offer or regulating the essential aspects of the contemplated contract.

Essential aspects to remember

In summary, and according to Spanish jurisprudence, agreements/ Letters of Intent:

• Take place in the negotiation processes.
• Constitute pre-contractual agreements other than forming a pre-contract.

Likewise, they cannot be compared to the projected contract, since they contain a certain indeterminacy with respect to the essential elements of the said contract. Neither can they be considered an offer susceptible to acceptance.

It should be taken into account that they are integrated into the preliminary deals and that they can collect agreements on the content of the definitive contract or on the negotiation process.

Especially important is that they may contain binding obligations. Therefore, implicitly, jurisprudence is admitting that they can be considered as contracts.

Finally, the document must be qualified by content rather than by title. And they must also deal with subsequent acts of the parties.

Conclusion

We can conclude that Letters of Intent in Spain is a document that ALWAYS has to be reviewed by a lawyer for its conciseness, and to regulate the spirit of the contract. In short, it is an extraordinarily sensitive legal document.