A non-binding LOI can still create binding acquisition obligations

The label does not control the legal result

A letter headed "non-binding" can contain binding obligations, and a document called a memorandum of understanding can amount to a contract. The question is what the parties declared, what they could reasonably infer from each other's conduct and the surrounding circumstances. That follows from the rules on intention and reliance in Book 3 DCC and, for interpretation, from the Haviltex standard set out by the Hoge Raad.

The risk is not confined to signed documents. A settled price, identified target, agreed structure and a sequence of implementation steps may support an argument that the essential terms were agreed, even if the long-form SPA remained under negotiation. Conversely, clear conditions and a documented intention to proceed only on execution of definitive documents can prevent that conclusion.

Case law shows how fine that line can be. Where the parties agree the object and price of a share transaction in an LOI but make the agreement conditional on a satisfactory due diligence outcome, a court may treat the arrangement as a binding conditional share purchase agreement. The buyer may then still rely on the unsatisfied diligence condition after disappointing findings.

Three liabilities should be kept separate

The first risk is that a court finds an acquisition agreement was formed. In that case, the issue is contractual performance or non-performance, not merely broken negotiations. The remedy depends on the contract, including any conditions, termination rights and limitation of liability provisions.

The second risk is pre-contractual liability. In Plas/Valburg, the Hoge Raad recognised that the stage and course of negotiations can affect the consequences of withdrawal. In CBB/JPO, it placed contractual freedom first and made clear that liability for ending negotiations is exceptional.

Recovery of the positive contractual interest is therefore exceptional. It requires circumstances making withdrawal unacceptable according to standards of reasonableness and fairness, rather than simply substantial time, cost or expectation. The assessment depends on the complete negotiation history, any reservations and the conduct of both parties.

The third risk is breach of a provision that the LOI expressly makes binding. Confidentiality, exclusivity, costs, governing law and forum are often intended to bind immediately. A party can therefore be free to decline the acquisition while remaining liable for breach of exclusivity or misuse of confidential information.

The binding and non-binding sections need different drafting

A well-structured LOI contains a short binding section and a distinct non-binding section. The binding section identifies the parties, the exclusivity period, confidentiality regime, costs rule, governing law, forum and any permitted announcements. It should also state whether the costs provision is exclusive or leaves a claim for breach of another binding clause intact.

The non-binding section should state that no obligation to buy, sell, finance or complete arises until a definitive SPA is signed by authorised signatories. It should list the principal matters still subject to agreement, including diligence, financing, internal approvals and transaction documentation. A reservation such as "subject to contract" is more useful when used consistently in correspondence and drafts than when appearing once in a heading.

Withdrawal rights should state that either party may end discussions at any time, subject to the binding clauses. The provision should address whether an email is sufficient notice and when exclusivity ends. It can also record that drafts, negotiations and diligence do not themselves create an obligation to continue negotiating, although the parties' conduct and the surrounding circumstances remain relevant to the legal assessment.

Conduct after signature can override the intended message

The post-LOI timetable should match the reservations. Drafting a SPA, preparing integration, contacting customers or making an announcement are not inherently inconsistent with a non-binding process, but they need disciplined documentation. Communications should describe the work as preparation subject to definitive agreement and satisfaction of the stated conditions.

Exclusivity remedies should be proportionate to the transaction. In the lower mid-market, a fixed fee for breach, reimbursement of specified abort costs or an indemnity for documented process costs may provide a clearer route than an ambitious break fee. The amount, trigger, payment date and relationship with other remedies need to be stated.

A break fee is not a substitute for a binding SPA. It should identify the circumstances in which it becomes due, distinguish withdrawal permitted by the LOI from breach, and avoid uncertainty about whether it is a penalty or a negotiated allocation of costs. A practical LOI is one in which the text, the timetable and the parties' conduct all say the same thing.

The timetable should preserve the intended status

A process letter can support the LOI by identifying the diligence workstreams, draft timetable and decision gates without implying that the transaction has been approved. Internal approvals should be described as conditions to any definitive agreement, not administrative steps after a concluded transaction. The same discipline applies to financing discussions and external communications.

Where a party needs certainty on a particular issue before committing, that issue belongs in the binding section as a condition or information right. Leaving it in non-binding commercial language can create pressure without a clear legal consequence. The document should distinguish a genuine obligation from a target date or statement of intention.

Authority should be visible in the paper trail

The documentary record should identify the persons authorised to negotiate and sign the LOI and any subsequent SPA. A clear approval process supports the intended reservation of rights and reduces the chance that operational communications are treated as a final commitment. Where board or shareholder approval is required, the LOI should say whether that approval is a condition to definitive agreement or a binding condition of the interim arrangement.

The same point applies to announcements. A jointly agreed announcement can be necessary for a listed group, a regulated business or a sensitive customer base, but it should not state that completion is certain unless that is the parties' intended legal position. The agreed wording should match the conditions and the timetable.