Oregon Supreme Court Affirms the Enforceability of Letters of Intent

A recent E-News article addressed new developments in Oregon law regarding the enforceability of letters of intent - sometimes considered "agreements to negotiate." As many business owners know, letters of intent can be valuable tools in both business and real estate transactions, setting forth the basic terms of proposed transactions without formally binding either party to a deal. However, in Logan v. D.W. Sivers Co., the Oregon Court of Appeals ruled that letters of intent are enforceable in some circumstances and awarded significant damages to a buyer that failed to close on a prospective purchase following the seller's breach. ("Logan I"). Prior to Logan I, no Oregon appellate court had ruled on the enforceability of letters of intent.

The Logan I decision created substantial risk and uncertainty regarding the use of letters of intent and their enforceability in business and real estate transactions. Needless to say, business owners were anxiously awaiting the opinion of Oregon's highest court on the letter of intent issue. That wait is now at an end, as the Oregon Supreme Court recently affirmed in part and reversed in part the Logan decision ("Logan II"), finding that letters of intent are indeed enforceable in some circumstances.

The Oregon Court of Appeals Decision in Logan I.

A brief overview of the underlying facts in Logan I may be helpful. In Logan I, the Court enforced a "nonshop" provision, under which the seller promised not to solicit other offers or contract to sell a property to a third party for a period of 60 days after the letter of intent was executed. Finding that the seller breached this provision, the Court awarded the would-be buyer over $900,000 in damages, based upon the amount the buyer was forced to pay in income taxes after its intended 1031 real property exchange failed as a result of the transaction that failed to close.

Affirmation of the Enforceability of Letters of Intent.

The Oregon Supreme Court agreed with the Court of Appeals in finding that letters of intent are indeed enforceable under certain circumstances. Although a provision of the letter of intent expressly provided that the parties intended only to set out a framework for a future purchase and sale agreement, certain provisions of the agreement were sufficiently definite so as to be enforceable. Thus, while the Court agreed that the letter of intent was generally framed as an "agreement to agree" on the final purchase and sale of the property, the parties had exchanged definite promises on certain narrowly drawn issues, including, the promise to be bound by the "nonshop" provision.

Where the Oregon Supreme Court departed from the decision in Logan I was on the award of damages to the buyer. While Logan I resulted in an award of over $900,000, the Oregon Supreme Court determined that the buyer was only entitled to damages suffered as a result of the seller's breach of the specific nonshop provision. The court focused on the limited scope of what was actually agreed to by the parties - the promise to comply with the nonshop provision. Due to the language of the letter of intent that specifically disclaimed any intention to enter into a binding agreement to complete the purchase of the property, the court found that the "parties clearly intended, and clearly had the right to expect, that that disclaimer would shield them from any liability for failing to carry through with the sale." Thus, Logan I erroneously awarded damages to the plaintiff based on the breach of the letter of intent as a whole, and not the breach of the specific "nonshop" provision. According to the Oregon Supreme Court in Logan II, the plaintiff should only have been entitled to any expenses incurred in attempting to negotiate a final agreement with the defendant for the purchase and sale of the property.

The Bottom-Line.

Now that the smoke has cleared, businesses should expect that letters of intent may be enforceable under certain circumstances. The relevant consideration is the definiteness, or lack thereof, of the terms of the letter of intent. While the letter of intent as a whole may be couched in terms of being merely being an "agreement to agree," certain provisions of the letter of intent may be independently enforceable. Following Logan I and Logan II, businesses and individuals should consider consulting an attorney prior to signing any letter of intent. Your attorney will work to ensure that certain provisions of the letter are clearly nonbinding, and that any binding provisions are specifically identified as such. If you would like more information relating to letters of intent for your business or real property transactions, please contact Randall L. Duncan, Chair of Dunn Carney's Closely Held Business Team. We will be happy to assist you.

Closely Held
Business Team

The Closely Held Business Team - Dunn Carney is dedicated to assisting business owners in navigating through the opportunities and challenges the law presents to advance each owner’s success in business. They understand the multifaceted issues business owners face each day and the need for responsive and proactive legal counsel.

Team members include:
Randy Duncan, Team leader
Bob Allen
John Barhoum
Merrill Baumann
David Buono
Brian Cable
Jack Cooper
Ken Davis
Tim Hering
Frank Hilton
Elizabeth Howard
Scott Jonsson
Robert Kerr
JoDee Keegan
Tamsen Leachman
Kelly Martin
David Rossmiller
Tony Sayess
Kyle Stinchfield
Dan Vidas
Matt Wilmot
Bob Winger
David Zehntbauer