How to Determine If a Letter of Intent Is a Binding Contract ?
In Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 70 (2nd Cir. 1989), the parties were negotiating the sale of a fertilizer business and entered into a letter of intent.
The letter specified the purchase price, the timing and amounts of the payments, the fixed assets to be purchased, and a closing date. Id.
However, the letter also provided that "the service and supply agreement will be negotiated and agreed to by December 31, 1986 and a binding sales agreement will be completed by December 31, 1986." Id.
The court, applying New York law, identified five factors to consider in determining whether parties to a preliminary agreement intend to be bound:
(1) the language of the agreement;
(2) the context of the negotiations;
(3) the existence of open terms;
(4) partial performance;
(5) the necessity of putting the agreement in final form, as indicated by the customary form of such transactions." Id. at 72.
The court found the first factor determinative of the parties' intent, as a matter of law. Arcadian Phosphates, 884 F.2d at 72-73.
Two references in the letter of intent that the negotiations might fail and the reference to a binding sales agreement to be completed at a future date showed that the parties did not intend to be bound. Id. at 72.