The Letter of Intent Said “Nonbinding.” The Exclusivity Clause Didn’t.

The owner of a commercial HVAC company agrees to sell the business for $3 million. She and the buyer sign a letter of intent covering the price, due diligence, and a target closing date. The top of the first page says, in bold capitals, “NONBINDING LETTER OF INTENT.” She assumes she can walk away at any time.

Two weeks later, however, a second buyer offers $3.5 million, and she accepts. When the first buyer threatens to sue, she discovers that four paragraphs below the heading, the letter included a 60-day exclusivity clause barring her from negotiating with anyone else.

“Nonbinding” Usually Refers to the Deal, Not Every Clause

A letter of intent records the parties’ preliminary understanding before a final contract. The sale itself usually remains subject to due diligence, financing, and a definitive agreement, so neither side is obligated to close. But the same document often contains provisions meant to bind the parties immediately: exclusivity, confidentiality, allocation of expenses, governing law, and dispute resolution. Carefully drafted letters say expressly which provisions are binding. The heading alone doesn’t decide it.

The Buyer Couldn't Force the Sale. But Could the Seller Talk to Anyone Else?

An exclusivity clause, often called a no-shop, gives the buyer time to investigate without worrying that the seller is using its work to attract a better offer. In exchange for the buyer spending money on accountants, lawyers, and site visits, the seller agrees not to solicit or negotiate with other buyers for a set period. If that clause is binding, negotiating with the second buyer during the 60 days may breach it, even though the seller never had to complete the first sale. Whether it’s binding depends on the clause’s wording and how the letter treats it.

The Confidentiality Clause May Survive the Failed Deal

Now suppose the proposed buyer receives sensitive financial information during due diligence, including customer lists, supplier pricing, employee compensation, and operating margins, and then decides not to proceed.

Can it use that information to compete with the seller? Not necessarily.

A confidentiality provision may restrict how the buyer uses or discloses information obtained during negotiations. Some agreements, for example, require the return or destruction of confidential materials when discussions end. Others impose restrictions that continue for several years, and those obligations may survive even when the acquisition itself never happens.

Whether a particular clause is enforceable depends on its wording and applicable law. But the parties should not confuse the absence of a completed transaction with the absence of continuing contractual duties.

What About the Costs of a Deal That Never Closed?

Suppose the buyer spends $75,000 on legal fees, accounting work, and due diligence, and the seller then abandons the transaction. Can the buyer recover those expenses? Not automatically.

Preliminary agreements frequently allocate transaction costs, sometimes requiring each party to pay its own expenses regardless of whether the deal closes. Other arrangements may provide specific remedies for certain breaches.

If the seller violated an enforceable exclusivity obligation, the buyer may pursue damages, including lost profits, that can be established under the governing legal rules. But the fact that one party spent substantial money preparing for a proposed deal does not, by itself, make the other party responsible for those expenses. A failed business negotiation is not necessarily a compensable breach.

What If the Letter of Intent Is Ambiguous?

A letter of intent does not always make clear which obligations, if any, are legally enforceable. In Quake Construction, Inc. v. American Airlines, Inc., 141 Ill. 2d 281 (1990), a contractor received a letter of intent stating that it had been awarded work on a construction project. The letter authorized work to begin within days but also contemplated a more formal contract to be signed later. When the project was canceled, the contractor sued.

The Illinois Supreme Court found that the letter was ambiguous. Some provisions suggested that the parties had already reached a binding agreement, while others suggested that no binding obligation would arise until a formal contract was signed. Because the document supported both interpretations, the Court concluded that additional evidence could be considered to determine what the parties intended. It did not decide whether an enforceable contract actually existed.

The case illustrates an important distinction: calling a document a "letter of intent" does not necessarily make it nonbinding. Courts examine the language of the agreement and whether the parties intended to assume enforceable obligations.

A document meant to avoid commitment can create considerable legal uncertainty if its provisions suggest otherwise.

A Commitment to Not Committing

Businesses often use preliminary agreements because they want flexibility. They want enough commitment to justify investing time in negotiations, but not so much that they become obligated to complete a transaction before the details are settled.

That can be perfectly legitimate. But the difficulty arises when the parties treat the document as optional in its entirety, even though it creates specific obligations designed to govern the negotiation process.

A carefully drafted letter of intent should make clear which provisions are binding, which are not, when obligations begin and end, and what happens if negotiations fail. Its provisions should also fit together, since provisions that contradict each other invite exactly the dispute in Quake.

If the other side is refusing to honor an agreement or disputing what was promised, we can help you evaluate your rights and available remedies. Contact us to discuss your matter.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our commercial litigation services. The available remedies depend on the governing agreements, the evidence, and the parties’ respective obligations. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.