Pre-contractual agreements “Negotiation regulated by the letter of intent”

Luca Davini
Lawyer in Milan and Turin

A useful tool to be used in international transactions (but not only) is to sign pre-contractual agreements called letters of intent (Loi) with which the parties can start a serious negotiation without yet (by strategic choice or due to the complexity of the operation) commit to the final target.

Lois, with which the parties first of all test their mutual interest in the continuation of the discussions (which sometimes responds to specific needs of the management or the investor or other third parties involved), can be used, in the negotiations phase preceding the conclusion of the international contract, for various purposes. Among said purposes a prevailing one is the regulation of future negotiations on a deal, including rules of conduct to be followed or the establishment of elements of the future contract.

Variable contents

If the objective of the parties is to protect the future commercial negotiation, the Loi, especially in the context of complex economic transactions (merger & acquisition, joint-ventures, facilities supply and licensing), will, as a rule, provide for specific rules of conduct. Instead, in the event that the final agreement is very close, the Loi will contain a consistent part of the economic substance of the deal, leaving the final details to a subsequent contract.

In the first case, the parties will probably provide in the Loi protection and preparation rules of the negotiation including, for example, secrecy clauses (non-disclosure agreement), exclusivity clauses in negotiations (standstill agreement), providing for the prohibition of contacting third parties for the same object of negotiation, pre-emption clauses (right of first refusal) regarding the conclusion of the contract, the timeframe for carrying out feasibility studies of the operation and modalities for withdrawal from the negotiations with possible forecast reimbursements for particular charges incurred (for example, preparation of projects or technical documentation) in case of non-stipulation. These conduct obligations on the parties, to the extent they are clearly expressed, shall be binding.

In the event that, on the other hand, the final agreement is very close to be stipulated, assuming that the previous pour parler have already reached an advanced stage and that elements remain to be defined that, although important, are not such as to suggest that the deal will not be concluded, the content of the Loi could represent an almost conclusive stage of the future contract (this is the so-called punctuation or draft contract, which has an essentially historical and evidentiary function of negotiations).

Goals setting

In general, it should be taken into account that often letters of intent are formulated by engineers or commercial experts who are not familiar with the legal categories and the contents of the applicable law.

The practical advice is to establish in the text of the Loi, from the beginning, what is the purpose of the negotiation, what are the commitments that you want to assume and what are those that you do not want to assume and, if you do not want to commit, to clearly express it in the text.

On the contrary, if one wishes to commit to conclude, it will be necessary to define the subject matter of the undertaking and the consequences of the non-performance indicating, after careful evaluation, the law applicable to the Loi and the method of dispute resolution.

Non-disclosure agreement

With specific reference to the clause or contract (as it can be agreed upon separately and apart from the stipulation of a Loi)- of non-disclosure agreement (so-called Nda), also called confidentiality agreement which is particularly important for the safeguarding of the business know-how it performs, it can be said that its finalization reduces as much as possible the risk that the counterparty does not conclude the contract and that later uses the information it became aware of at the negotiation stage to make profits to the detriment of the counterparty.

For example, consider the case of the breach by one party of the obligation of non-disclosure of secret information owned by the other partner, which will enable the latter to claim compensation for the damage suffered.

The main obstacle to the real effectiveness of these agreements, on the other hand, is the difficulty for the aggrieved party to prove that the other party used the information in question: however, having a written agreement will undoubtedly be a valuable deterrent for the counterparty.

It should, of course, be borne in mind that in the context of the negotiation of an international contract, an agreement that is excessively unbalanced toward the party disclosing the information, which tends to qualify certain information as secret at the discretion of only one of the parties, will expose the counterparty to the risk that, in the event of failure to conclude the contract, it will then be unable to use information of which it was already aware of before the negotiations.

From an operational point of view, great care must be taken in making use of available models that can be found, perhaps on the internet, as they often suffer from the Anglo-Saxon contractual experience (which is rather different from the Continental one) and their content is not always suitable for the commodity context in which it operates.

The economic operator who intends to finalize a confidentiality agreement, in the form of a non-disclosure agreement or other contractual form, is therefore advised to define which are the transmissible information subject to the obligation of non-disclosure, the duration of the obligation, the compensation penalty in case of non-fulfillment, as well as the competent judge and any applicable law.

Gentlemen agreements

On the other hand, the so-called gentleman agreements deserve a separate discussion. In commercial practice they are regarded as informal and non-binding arrangements. Failure to comply with them would imply as the only sanction the loss of credibility in business.

To the extent that testimonial evidence is allowed in order to prove its content, they could be considered as entirely binding and enforceable understandings.

If these gentleman agreements were written, they could be even more easily enforceable by being legally impracticable to invoke their ineffectiveness by claiming that they were not binding because they were based on credibility. In any case, the criterion to be followed will always be that of the clarity of the commitments undertaken or not, despite the title of the act.

                                                                                      

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Marcello

Dear Aurelia, the information you have provided are not sufficient for an answer which is subject to a professional engagement. In any case, we should study the provisions of the contract and identify governing law of the contract.If it does not provide anything on governing law then conflict law shall apply (in the most part of the countries likely the governing law will be the law of the country where the agent is domiciled). best regards Marcello Mantelli

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Aurelia

I signed a contract with a fashion agency but there were no termination clauses in the contract and decided to withdraw it before one week after signature so sent them an email but after 14 days they sent me an email and asserted that because i didnt withdraw in legal deadlines i have to perform the contract and pay whole money.Noboday told me about any deadlines and nothing was in the contract!! Why did they claim such a thing?

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