Thursday, May 7, 2009

Letters of Intent may be Binding Contracts

The Ontario Court of Appeal has awarded a spurned purchaser of a business damages equivalent to his loss of financial benefit for the first seven months in which he would have operated the business. In doing so, the Court increased the trial judge's award by four months.

In the case of Wallace v. Allen, the parties after some weeks of negotiation, entered into a "letter of intent" for the purchase by Mr. Wallace of four companies owned by Mr. Allen and his wife. During the next few months, Mr. Wallace began to attend at the business premises daily with a view to learning the business, getting to know the customers and staff of the business and doing everything necessary to provide a smooth transition of the ownership of the business from Mr. Allen.

The parties signed a letter of intent which read in part:

It is also agreed by the parties that there will be much legal work to be done upon acceptance by both sides and that the wording of this agreement may alter somewhat...

This letter of intent must be reduced into a binding agreement of purchase and sale by the parties within the next 40 days.

Within weeks of signing the letter of intent, Mr. and Mrs. Allen held a special employee meeting where Mr. Allen announced his retirement and the fact that he had sold his company and that the deal was "solid". Mr. Allen introduced Mr. Wallace to his employees, customers and business contacts as the "new owner" of the business. However, on the morning that the transaction was set to close, Mr. and Mrs. Allen refused to complete the transaction.

The trial judge fixed Mr. Wallace's damages at $240,000.00 representing his loss of financial benefit for the first three months of operation of the business. The trial judge found that Mr. Wallace had mitigated his damages by purchasing another business, although his evidence was that he had ample resources to fund both deals.

On appeal, the Ontario Court of Appeal increased Mr. Wallace's damage award to seven months. The Court found that the clauses referred to in the letter of intent contemplated and expressed an intention on the part of the parties to be bound by its terms which were to be incorporated into a more formal document.

The parties used the language of contract - they used terms such as "it is agreed" and "upon acceptance" and "this agreement" which indicated an intention to be bound upon the signing of the letter of intent.

In addition, the conduct of the parties after signing the letter of intent clearly demonstrated that they considered themselves legally bound to its terms . For several months, the parties conducted themselves as though they had a deal and the parties showed up at the lawyer's office prepared to sign the share purchase agreement.

The Court rejected Mr. Wallace's claim for specific performance of the share purchase agreement. It held that while the company itself may be unique in what it does (the argument can be made that every business is unique) Mr. Wall,ace's acquisition of the business was not - he acquired business for a living. In any event, it was nearly four years after the deal was scheduled to close and that delay in time made damages a more appropriate remedy.

In awarding seven months damages, the Court found that three months was simply not enough time for a business person to search out and find another opportunity, negotiate a new agreement of purchase and sale and close that transaction.



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