A Letter Of Intent The Seller Thought Was Just A Roadmap

The situation

The owner of an Ontario manufacturing business had spent months in informal conversation with a prospective buyer — a competitor two towns over who wanted the customer list and the equipment. After several weeks of back-and-forth on price and terms, the two sides and their advisors signed a two-page letter of intent. It set out the purchase price, the structure (a share purchase), a list of assets and liabilities each side had agreed to include or exclude, and a target closing date. The seller signed it believing it was a roadmap for the lawyers — not a deal. His reason: the letter itself said there would be “much legal work to be done upon acceptance by both sides” and that it “must be reduced into a binding agreement of purchase and sale… within the next 40 days.”

The problem

Six weeks after signing, and while the parties' lawyers were still drafting the definitive share purchase agreement, the seller received an unsolicited offer from a third party at a materially higher price. He stopped returning the buyer's calls, then told the buyer directly that the letter of intent was not binding and that he was free to sell to whoever he liked until a formal agreement was signed. In the interim, the buyer had already begun working in the business, introducing himself to staff and customers as the incoming owner, and had put the deposit funds in trust in anticipation of closing.

The numbers

The letter of intent price was fixed and complete: purchase price, adjustments, and a closing date, with no term left as “to be negotiated.” The competing offer that surfaced afterward was higher — high enough that walking looked, on the numbers alone, like the better outcome for the seller. The gap between what specific performance would cost the seller and what a damages claim alone would have cost the buyer is the entire reason this file turns on a remedy question as much as a formation question.

The rule that decided it

The governing Ontario authority on a signed letter of intent that contemplates a further, more detailed agreement is Wallace v. Allen, 2009 ONCA 36, a decision of the Court of Appeal for Ontario (Laskin, Armstrong and MacFarland JJ.A.) arising from an almost identical fact pattern: a signed letter of intent for the sale of a business, a clause requiring the letter to be “reduced into a binding agreement of purchase and sale… within the next 40 days,” and a seller who, after months of the buyer running the business and introducing himself as the new owner, refused to close.

The trial judge in that case found the parties did not intend to be bound until a final share purchase agreement was signed. The Court of Appeal reversed. It applied “the presumption in law that one who executes a commercial document intends to be bound thereby,” and held that “when read as a whole, the document… evidences the intention of the parties to be bound.” On the specific clause contemplating a further agreement, the court was direct: those clauses “contemplate that it is the wording of this agreement… that may alter somewhat and must be reduced into a binding agreement of purchase and sale… and only the wording, not the substance.” A clause anticipating a longer, more formal document is not, without more, a clause deferring the parties' intention to be bound.

Two things did the work. First, completeness: every term either party considered essential to the transaction had been settled and recorded in the letter itself — nothing of substance was left open for the “further agreement” to supply. Second, conduct: the court held that “the conduct of the parties after signing the letter of intent clearly demonstrates that the parties considered themselves legally bound to its terms” — the buyer working daily in the business, the seller introducing him to staff and customers as the new owner, both sides showing up to close on the scheduled date. Conduct consistent with a completed deal is evidence a court will weigh against a party's own after-the-fact claim that nothing was final.

What decides it is not a label. Nothing in the Court of Appeal's reasoning turns on whether the document used the word “binding,” “non-binding,” or said nothing on the point at all. The presumption applies to a signed commercial document regardless of its caption, and a caption is only one piece of evidence a court reads against the rest of the document and the parties' conduct — it does not pre-empt the analysis.

The outcome

Applying that authority, the buyer obtained an order for specific performance: the seller was compelled to complete the sale on the letter of intent's original terms, at the original price, notwithstanding the higher competing offer. The seller's belief that he could walk away because “the real agreement” had not yet been signed was not a defence — the letter of intent he had already signed was the real agreement, on the terms it actually stated.

What it would have cost otherwise

Had the seller succeeded in treating the letter of intent as a non-binding roadmap, the buyer's only recourse would have been a claim for reliance damages or lost opportunity — the cost of the months spent operating the business in anticipation of ownership, and the cost of a deal it no longer had, at a price it had already agreed and budgeted against. Specific performance, once the letter of intent is found binding, converts a fight about compensation into a right to the actual bargain — which is exactly why the label a party puts on a preliminary document matters so much less than what the document actually says and does.

The tell

The tell was in the seller's own earlier conduct, not in the document. He had rejected two earlier drafts of the letter because, in his words, “there remained too many things up in the air.” He signed this one because everything material had been resolved. A party who refused to sign until a document was complete has a hard time later arguing the completed document he did sign wasn't the deal.

Takeaways

• • A clause contemplating a future, more formal agreement does not by itself defer the parties’ intention to be bound — Ontario’s Court of Appeal has said so directly.
• • Completeness of essential terms is the first thing a court checks: if nothing material is left for the “definitive agreement” to supply, the letter of intent is doing the binding work already.
• • Conduct after signing — working in the business, introducing a buyer as the new owner, showing up to close — is evidence a court will weigh against a later claim that nothing was final.
• • If a party genuinely wants a letter of intent to be non-binding as to price and structure, that has to be drafted as an express, unambiguous statement to that effect — not inferred from a clause about future paperwork.
• • The risk here runs the opposite way from exclusivity, deposit and break-fee disputes: those concern terms everyone accepts are binding. This concerns whether the commercial terms are, and the answer can surprise the party who assumed they weren’t.

Sources

• • Wallace v. Allen, 2009 ONCA 36 — Court of Appeal for Ontario, MacFarland J.A. (Laskin and Armstrong JJ.A. concurring), reasons at paras. 10–37: the presumption of intent to be bound (para. 26–27), the completeness of the letter’s terms and the clauses contemplating a further agreement (paras. 27–28, 31), and the post-signing conduct of the parties (paras. 32–37).
• • Glossary: letter of intent (LOI).
• • Treadstone Law — which clauses in an Ontario LOI are actually binding — sets out the usual default (confidentiality and exclusivity typically bind; price and structure typically don’t). This file is the exception to that default: a commercial-terms LOI complete and acted-on enough to override it, per Wallace v. Allen.