By John Cockburn, Partner
You have been approached by a stranger (or a friend) and asked to consider selling your successful business to that person. Neither you nor he want to waste money on a lawyer to put together any formal agreement until you have sized each other up and know you both want to proceed.
You have heard your friends boast about how easy it is to whip up a layman's “Letter of Intent” (LOI) to tide you over until you are ready to spend money on a lawyer.
Is this a good idea?......NO WAY! Although an LOI has its place, there are two very significant considerations:
1. If important terms are omitted from the LOI it is virtually impossible to work them into the ultimate “Agreement”, without losing credibility “that’s not the deal we discussed!”
2. If the LOI is not very carefully drawn and you decide not to proceed further, you run a very real risk that the Courts will permit the stranger to enforce the LOI as a contract against you.
The Ontario Court of Appeal recently did just that and it cost the potential vendor hundreds of thousands of dollars in costs to learn that his homemade document - the parties called a Letter of Intent - was indeed an enforceable contract!