The case of Up Hydro, LLC v. Artibee heard by the Michigan Court of Appeals is critical for all parties who want to use letters of intent as part of the purchase agreement. The plaintiff, who wanted to get out of the agreement, argued that no binding contract existed because its offer stated it was “pursuant to the terms and conditions of a separate offer agreement to be signed by us.” When the plaintiff decided he didn’t want to go through with the sale, he filed a claim to assert a claim on the property, and the defendant counterclaimed for breach of contract.
The court agreed that parties can enter into a contract to enter into a subsequent agreement and it can be valid just like any other contract. However, in this case, the court said the real question was whether the parties expressed all the essential terms for a contract in the initial writing. In this case, the parties specified the amount to be paid, the description of the property, and the terms of payment. Next, the court asked whether there was a condition precedent to go through with the sale. In this case, because the plaintiff did not offer “a good faith basis for its refusal to agree to the survey generated property description”, the court held the plaintiff had no basis to invoke the condition precedent to close. In other words, the person who does not want to close cannot act in bad faith and use that as a basis to claim that all the conditions for the sale are not met.
[pullquote]My takeaway from this is that there’s often no value in having a letter of intent to a transaction.[/pullquote] My takeaway from this is that there’s often no value in having a letter of intent to a transaction where the parties want to have specific terms stated. The reason is two-fold: (1) you end up spending a lot of time simply negotiating the letter of intent when you could be negotiating the definitive agreement; and (2) if you’re unsure whether you ultimately want to go through with the deal, then the terms of the letter of intent must be so vague so that it cannot be construed as a definitive agreement (and in this case, you may simply want to negotiate the final agreement as well).
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