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PAGE 8 COMMENT November 23, 2009 • Law Times M any clients consider the input of a lawyer to be a painful and costly evil best left until the last possible moment. Often, this means that law- yers get involved only after settling and memorializing the fundamental business in a so-called non-binding letter of intent. However, we all know that this ostensibly parsimoni- ous approach to legal services may very well be a false econ- omy. Nowhere does this false economy manifest itself bet- ter than in the recent Ontario Court of Appeal decision in Wallace v. Allen. Th e case shakes the core of what had previously been under- stood to be the law relating to Avoiding letters of intent that bite The letters of intent and highlights for both clients and counsel the magnitude of obligations that a casually drafted letter of intent can create. Th e impact of the decision resonates in almost every aspect of commerce. In Wallace, the owner of a company entered into a putatively non-binding letter of intent with a prospec- tive purchaser that contained the following operative lan- guage: "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 agree- ment may alter somewhat. . . . Th is letter of intent must be re- duced into a binding agreement of purchase and sale by the Dirt By Jeffrey W. Lem parties within the next 40 days." Save the above, the letter of intent contained all of the major aspects of an agreement that would otherwise have been necessary for contractual certainty. To the extent that there were any details omitted, the court found that the parties had reached consensus ad idem on all such outstanding issues shortly thereafter in a meeting. However, when it came time to actually sign the fi nal agreement of purchase and sale to close the transaction, the vendor developed cold feet and ultimately decided that he was better off keeping the company. He justifi ed his right to do so by noting that the letter of intent had never been formally con- verted into a "binding agree- ment of purchase and sale" as contemplated. Th e trial court agreed with the vendor's argu- ments and refused to enforce the deal since there was technically no agreement to enforce until the parties signed the agreement of purchase and sale. Th e appeal court, however, thought otherwise. While it was true that a for- mal agreement of purchase and sale had never been executed, Subscribe to Law Times Why pay extra for your legal news? Cutting-edge legal affairs, news and commentary for just 37¢ a day! Make the time for Law Times and keep up with all the developments in Ontario's legal scene. Subscribe today and receive: • Unlimited access to the Law Times digital editions and to our digital edition archives...FREE • Canadian Legal Newswire, a weekly e-newsletter from the editors of Law Times and Canadian Lawyer...FREE the court found plenty of signs that the parties had, in fact, struck a deal in the letter of in- tent. For instance, it noted that, ever since the signing of the let- ter, the putative vendor acted as if he had already sold the busi- ness. In fact, he had already had the usual meetings with friends and family announcing his re- tirement and the sale of the company. He introduced the proud new owner to the com- pany's employees. He even al- lowed the purchaser to actually start working full time on the shop fl oor and to start hiring a management team. Th e court found that such conduct, when considered cumu- latively, was suffi cient evidence of a deal and awarded damages against the recalcitrant vendor as if it had been refl ected in the letter of intent and then subse- quently avoided without cause. Th ere seems to be an almost intuitive tendency amongst cli- ents to try to hammer out all of the basic details of a business transaction using vague terms and bad prose before incur- ring the cost of having a law- yer "legalize" the arrangement. Th e ubiquitous letter of intent seems to be the document of choice for doing so. However, Wallace serves as a poignant reminder that reliance on the non-binding nature of a let- ter of intent is not at all a sure thing unless drawn up carefully with meticulous attention to the operative provisions. One party in the Wallace case did get some legal advice prior to the fi nal draft of the letter of intent. But what's troubling is the realization that it's not entirely certain whether coun- sel would have drafted a docu- ment that would have survived the appeal court's analysis in Wallace. Th at's because letters of intent, even those drafted by commercial lawyers rather than by the clients themselves, are all too often based upon the binding agreements of pur- chase and sale they are intended to precede and, as such, often sound very much like binding contracts. Th e appeal court parsed the letter of intent, isolating phrases that implied a deal. So, for instance, it found relatively innocuous words like "agree," "acceptance," and "agreement" to be indicative of a crystallized deal even at the letter-of-intent stage. Wallace, then, may herald a paradigm shift in how early lawyers come into the process. Regardless, the prudent drafter should now exercise caution by expressly seeking to blunt the eff ects of any subsequent conduct or discussions and by abandoning much of the tra- ditional "off er and acceptance" nomenclature that has been prevalent in letters of intent until now. LT Jeff rey W. Lem is a partner in the real estate group at Davies Ward Phillips & Vineberg LLP. His e- mail address is jlem@dwpv.com. www.lawtimesnews.com Go to: www .lawtimesnews.com to subscribe today! Includes a FREE digital edition!

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