Business owners often use “letters of intent” (“LOI”) in the early stages of a deal to buy a business. Even an LOI that is “non-binding”, can create enforceable contractual obligations. Courts look at the wording chosen by the parties and their conduct to determine whether the LOI is enforceable.
Case in point – the recent judgment of the British Columbia Supreme Court, Clarkdale Motors Ltd. v. The Dilawri Automotive Group, 2024 BCSC 1829.
The Dilawri Automotive Group sought to purchase Clarkdale Motors Ltd., a Vancouver Volkswagen dealership, intending to buy the shares of Clarkdale.
Dilawri and Clarkdale signed an LOI, described as “non-binding”. In the non-binding LOI, they agreed on price, confidentiality, and a period of exclusivity. Dilawri had 45 days to “kick the tires” – to start a due diligence process and to provide written notice of satisfaction or waiver of its due diligence condition. Dilawri paid a deposit of $250,000 – refundable if Dilawri did not waive or was not satisfied with the due diligence condition within the period.
The Court held that Clarkdale, seller of the business, is entitled to keep a $250,000 deposit for an unsuccessful purchase and sale transaction. Dilawri, almost one year after signing the LOI and continuing to negotiate, chose not to proceed with the purchase. Dilawri’s deposit was forfeited to Clarkdale.
The Court held:
- The LOI was legally binding, in respect of some of its terms. Dilawri argued that the LOI was non-binding and that it came to an end, since it did not waive or was not satisfied with the due diligence conditions within 45 days. The Court disagreed, and held that the deposit created a legal relationship between the parties.
- The due diligence condition was satisfied within the period. Although, Dilawri did not give the notice, the LOI terms and the parties’ conduct led the Court to conclude that the due diligence condition was satisfied, as the parties continued negotiating terms of a share purchase agreement, lease, and announced the transaction to staff.
- By its conduct, Dilawri assured Clarkdale that it would not insist on the strict terms of the LOI regarding giving written notice. Clarkdale relied on that assurance, continued to negotiate a lease and a share purchase agreement, and continued to observe the confidentiality and exclusivity terms in the LOI. Therefore, Dilawri could not refer to those strict terms to avoid liability.
The decision provides a lesson – a “non-binding” letter of intent, may in fact be binding, despite the wording. Purchasers of a business are always encouraged to consult a lawyer, especially when considering not to proceed with a transaction. Potential liability could be significant, far exceeding deposit amounts.
Link to decision: https://www.canlii.org/en/bc/bcsc/doc/2024/2024bcsc1829/2024bcsc1829.html
