Letters of Intent — The BUSKLAW Newsletter

Forming (or not forming) a contract in the digital age can be a tricky business. Millennials in particular are more accustomed to negotiating deals not by exchanging offers, counteroffers, and acceptances as email attachments requiring signatures, but by emails, text messages, and social media exchanges. And each of these channels can easily include emojis: those funny little pictographs that are fast becoming ubiquitous in our digital lives.

But this casual approach can lead to confusion in contract negotiations. Before we discuss how, let's review basic legal principles of forming a contract under Michigan (and many other jurisdictions') law:

Verbal Contracts. Verbal contracts are generally enforceable if their subject matter isn't real estate, or goods priced at $1,000 or more. (Note to my IT clients: software programs are not "goods," so beware informal statements that can be construed to form a license agreement.) But there are problems of proving the terms of an oral contract because you have to line up witnesses to testify about what the parties agreed. It the stakes are high enough, however, this process can certainly play out in the courts.
Consideration. A valid contract generally requires "consideration." In its simplest form, consideration is value exchanged between the contracting parties. But consideration may also be a promise not to do something that you have a right to do, such as file a lawsuit.
"Formal" Contract - A Misnomer. There is no such animal as a "formal" contract. An enforceable contract can be made written out on a scrap of paper, a business card, or a paper napkin; a contract may even be evidenced by writing on the back of a paper check. And that writing doesn't have to contain all of the contractual terms. Courts will determine what provisions are essential to a contract sought to be enforced and whether an omitted provision can be supplied by implication.
"Formal" Signature - Another Misnomer. A written contract must be signed by the person contractually obligated. But a formal signature is not required. The following are valid signatures to a written contract: a typed, printed, or stamped signature; initials; or an electronic symbol or process attached to or logically associated with a record and adopted by a person with intent to sign the record. See my post here about how to avoid forming a contract by your email.
Emails and Text Messages - Satisfy the Written Contract Requirement. If a contract must be in writing, court cases hold that emails and text messages satisfy that requirement. You don't need a contract nicely typed on a piece of paper or a jargon-filled document like the one discussed here.
A Party's Subjective Intent Doesn't Matter. A contract can be formed regardless of whether one party to the deal didn't intend to form a contract. All that matters is that reasonable third parties with knowledge of the facts believe that a contract was made.
You Don't Have to Read a Contract to be Bound by It. You can't rely on the "I didn't read it" defense to contract enforceability. If you "signed" the contract or otherwise manifested your assent to its terms, you are generally obligated even if you didn't read some-or all-of the contract. This is especially true for website terms of use. (Your customer-facing website does have terms of use, right?)
A "Letter of Intent" Can Be Binding. As discussed in a previous post here, a letter of intent can be a binding contract, unless appropriate language is used that clearly negates that result. In my experience, business folks are too quick to sign letters of intent without legal review that includes a good understanding of the parties' business objectives, so letters of intent are best avoided.

Do these legal principles of contract formation give you pause because of their informality? (As in "Oops, I formed a contract!") They should!

This brings us to consider emojis in contract negotiations. You can easily picture two persons sending a series of emails (or texts) about purchasing some real estate. Let's say that Able is the seller of a Lake Michigan condo, and Baker is the buyer. Baker drives past Able's condo, notices a "for sale" sign, visits Able's website where a $1.5M sale price is posted. Baker then texts Able as follows:

Baker: "Just drove by your Lake Michigan condo in Holland, Michigan, and noticed your 'for sale' sign. I offer you $1.2M in cash for your condo to be paid in full at closing on October 1, 2016."
To which Able texts back to Baker: "Your offer of $1.2M is too low. I counter with $1.4M."
To which Baker responds in a text to Able with only the green "Thumbs Up" emoji shown above.
Able appears at the closing on October 1 with a warranty deed to Baker. But Baker does not appear; the deal doesn't close. Able sues Baker to enforce the sale, saying that Baker's reply with the green "Thumbs Up" emoji was sufficient evidence to show that he accepted Able's counteroffer of $1.4M. Result?

The validity of the deal might well hang on one thing: the meaning of the "Thumbs Up" emoji. To determine that, evidence may be introduced to show how (or whether) Baker used emojis in negotiating other business deals, and an emoji expert may testify about what a green "Thumbs Up" emoji generally means when used in contract negotiations. (And the inquiry might also include the objective meaning of a "Thumbs Down" or "O.K." emoji.) If the Michigan court (or jury) finds that this "Thumbs Up" emoji meant "I accept," then a valid contract was formed for the sale of Able's condo to Baker for $1.4M. But if it's determined that the "Thumbs Up" emoji instead meant "That's an interesting counteroffer, I'll consider it," then there was no contract!

It's just a matter of time before a court considers the effect of an emoji or two in a contractual formation dispute. The outcome is likely to depend on outside evidence, and the litigation will in any event be a money pit. So don't let your company be the test case! Emojis may be cute and save time, but they have no place in your contract-negotiation emails or text messages. In fact, you may want to revise the email section of your employee handbook to ban emojis, at least in external communications!

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Consider the letter of intent (also known as a "memorandum of understanding," a "preliminary agreement," or other innocuous-sounding title). Some business folks believe that a surefire way to do a deal at the last minute (and no reason to bother their lawyer at 5 PM on a Friday!) is to sign a letter of intent ("LOI"). The typical LOI is a short agreement that states some - but not all - of the terms of the deal, contemplating that the parties will eventually sign a complete or definitive agreement ("DA") that will state all of the deal's provisions, both business and legal.

LOIs are inherently troublesome (an "Invention of the Devil" according to one lawyer) because the parties to a LOI may disagree on its legal significance. One party may view the LOI as obligating the parties to sign a DA at a future date, even if a disagreement develops over the provisions in the DA that the LOI didn't address. The other party may regard the LOI as merely a non-binding understanding of the deal, with no obligation to ever sign a DA. This misunderstanding is a fertile field for resolution by time-consuming and expensive litigation or arbitration.

Unless a LOI contains an appropriate disclaimer (discussed below), Michigan courts will enforce a LOI if it contains all of the material and essential terms of the proposed future DA. And a jury (or arbitration panel) decides what these material and essential terms consist of. Further, some Michigan courts have held that even if some contractual provisions normally included in DAs in the particular industry are absent from the LOI, the LOI is legally binding if the parties used language stating their intention to be obligated. According to this legal precedent, the presence or absence of essential contract provisions is but one element in the evidential panorama underlying a factual finding of intent and responsibility. So, Michigan case law does not lead to a confident outcome in whether a LOI is a binding document or merely the parties' understanding of what a DA could include, with no obligation to enter into a DA.

But Michigan courts have decided that appropriate disclaimer language will make a LOI unenforceable if that language is unambiguous and explicit. One Michigan court approved the following language as an adequate disclaimer:

...all legal obligations of the parties hereto shall be set forth in the [definitive] agreement and other documents negotiated by the parties and their respective counsel...This letter of intent is not an offer (and acceptance hereof does not constitute an agreement) to consummate this transaction or to enter into the [definitive] agreement.
(Note: there are much better ways to state this disclaimer using plain English!)

Regardless of what side of the deal you are on - and even with an effective disclaimer -LOIs are more trouble than they're worth. If the deal matters that much, put the extra effort in doing a DA immediately (even if the business folks and their lawyers have to work nights and weekends to get it done - they'll survive). Don't give the devil his due!