ABSTRACT
The concept of the letter of intent first appeared and has been evolved in Anglo-American legal system and it has been taking an important part around the globe as well as in Turkey. Since then, due to the fact that contractual relations have been progressing and becoming increasingly widespread in recent years, the letter of intent is accepted as a legal concept.
With a letter of intent, the parties signify their intention to enter into a contract at the end of the contract negotiations. Since today the time spend during the contract negotiations are taking longer and the provisions in the contracts are longer and more detailed, the importance of the letters of intent has increased. In this article, the definition, legal status, differences between the similar institutions and bindingness of the letter of intent will be covered respectively.
1. INTRODUCTION
The letters of intent, which have not yet been defined exactly in Turkish legal system, have been introduced from Anglo-American legal system into the Turkish legal system. Because the letters of intent are rather a new concept which no equivalent provision available in the Turkish Code of Obligations no. 60981 (“TCO”), the rules on the legal status and bindingness are similarly applicable to the concept of legal intent.
The concepts which are known in Anglo-American Legal system, as Memorandum of Understanding, Heads of Terms and Letter of Intent have found their places as letter of intent in Turkish commercial life. The content of the letter of intent within the context of the AngloAmerican legal system has been taken as an example for the letter of intent introduced in Turkey.
It is observed nowadays that parallel with preferring to draft extensive and detailed commercial contracts, the process of initiating contract negotiations between the parties can be difficult and time consuming. Hence, parties are willing to create a general framework regarding the contract for the purpose of this framework to lead them through this long and difficult phase during the negotiations phase. Furthermore, it becomes necessary for the parties from their own perspective to apply such a binding or non-binding instruments during the contract negotiations. Because of this, the use of letter of intent has been increased in practice. In this study the letter of intent as one of the instruments that the parties apply during the contract negotiations shall be elaborated.
2. THE CONCEPT, DEFINITION AND LEGAL STATUS OF THE LETTER OF INTENT
The letter of intent is a written document outlining the contract that parties plan to formalize in the future, shaping the framework of the transactions to be detailed according to the scope of the ongoing contract negotiations and containing a non-binding statement of intention. In this context, the letter of intent can be defined as a statement of intention which has to be in a written format, non-binding and outlines the legal structure that has to be established and includes either the complete facts or some facts by leaving some of the facts out2, of one party to the other party3. Drawing on abovementioned definition, the party drafting the letter of intent, does not declare its intent to execute a contract, instead he only confirms to constitute a background of the contract, which is likely to be drafted. In other words, a letter of intent is a preparation to enter into a contract and even though a letter of intent does not constitute a binding commitment by either party, it establishes a mutual trust environment between the parties in which to continue negotiations. At the same time, the letter of intent is considered a vital instrument for the interpretation of the contract that may be executed in the future.
The letter of intent cannot be considered as a legally binding document because the party who drafts and sends it does not have the intention to be bound by it. As a matter of fact, for a binding contract to be established there is a need for the existence of mutual declaration of will.
The letter of intent, which is not considered as a declaration of will, also cannot be regarded as an offer in the legal sense. An offer is a serious and significant statement of will, which notifies and explains the intent of the offeror to the offeree to reach an agreement4. An offer must be required to contain all the essential components of an intended contract. A letter of intent, on the other hand, does not contain all essential components of a contract or even if it does, such components can be amended at any time during the contract negotiations and thus cannot be deemed as an offer. If the offeror declares his intention to initiate a contract negotiation or to proceed therewith, by indicating that he is not bound by his offer or by leaving the essential components out, this declaration can be deemed as an invitation to offer5. The inviter to offer will not be bound by the offer of the invited party, since he does not have an intention to be bound by his invitation in the first place. From this point of view, the letters of intent can be deemed solely as an invitation to offer but not as an offer.
Unless indicated otherwise in laws, the freedom of form principle stipulated in article 12 of the TCO is applicable for the contracts in Turkish legal system. The letters of intent are not regulated in any law and thus they are not subject to any form requirements. Indeed, based on the freedom of form principle, parties can issue a letter of intent in any form. The letters of intent generally are used as a form of letter in practice based on its name. However, there is no form requirement stipulated by any law for the letters of intent, which are written in essence.
Even if letter of intent is generally assumed to be a unilaterally drafted document, since it is in a form of letter, it usually appears as a bilateral process in practice. Furthermore, one can encounter a letter of intent that is signed by all parties. These bilateral signatures and reciprocity do not carry a letter of intent to a contract status due to the lack of the intention to be bound by it. These signatures only indicate that the parties are serious to proceed with their contract negotiations and yet do not bring the bindingness to the letter of intent.
3. THE DIFFERENCE OF THE LETTER OF INTENT FROM SIMILAR CONCEPTS
The types of the relations established through a contract between the parties have evolved as well in accordance with the changes and developments in commercial life. Therefore, the execution of more detailed contracts that would comprise of aforementioned relations in every aspect and provide legal security to the parties legally has become more and more necessary.
Therefore, the parties use the instruments such as letter of intent, pre-contract agreement, contract draft, gentlemen’s agreement and framework agreement in order to organize the contract making process, continue the negotiations seriously and simplify the negotiation process. There is no any other regulation available for aforementioned instruments except for the pre-contract agreements regulated under the TCO. Yet, even if each of these instruments is related to the contract negotiations, they differ from each other, in respect to the bindingness, form requirement and legal standing.
3.1 The Differences between a Pre-Contract Agreement and Letter of Intent
The parties undertake to enter into an obligatory contract and promise to enter into a contract through a pre-contract agreement stipulated in article 29 of TCO. In other words, pre-contract agreement is a legal transaction, which obliges the parties to enter into a contract in terms of legal sense6. By depending on a pre-contract agreement, the parties become entitled to demand to conclude the contract7. Hence, the pre-contract agreements are binding between the parties. If the validity of the main contract is subject to a specific form required by law in order to protect both parties, the validity of the pre-contract shall also be subject to the same form stipulated in the laws for the main contract. Whereas the letter of intent shall be valid without being subject to any form requirement for its validity.
Contrary to the letter of intent, the parties become obliged to make a contract upon concluding the pre-contract agreement, given to their bilateral and reciprocal declarations of will to make such contract. Since this obligation brought by the pre-contract agreement is an exception to the freedom of contract, the parties shall fulfill this obligation and furthermore, the order of law obliges the parties who have signed a pre-contract agreement to make a contract in line therewith8. In other words, the exception to the freedom of contract mentioned here is not an exception to enter into a pre-contract agreement. However, it creates an exception regarding the contract that the both parties undertake to conclude as a result of the pre-contract agreement. Whereas the letter of intent does not cause any binding result for any party, because it does not contain any commitment and the parties just state their intention through a letter of intent.
3.2 The Differences between a Framework Agreement and Letter of Intent
Another instrument that parties use during the contract negotiation is the framework agreement. The parties already draw up some provisions regarding the main contract planned to be drafted through framework agreement, yet this framework agreement does not oblige the parties to conclude such contract. Therefore, framework agreements constitute the basis for the contracts planned to be drafted in the future9. Although parties determine the limits of the contract likely to be drafted and they do not restrict their freedom in decision-making, except these limits. On the other hand, the letters of intent do not contain any bindingness in terms of the matters stipulated in the letter and commitment to make a contract in the future.However, the framework agreements will be binding upon the parties in case of concluding a contract by taking the scope of matters into the consideration as stated within framework agreement. In the light of these explanations it can be said that letter of intent differs from the framework agreement in terms of bindingness of each.
3.3 The Differences between Contract Drafts and Letter of Intent
Parties may prepare a document called contract draft which contains certain matters that parties agreed upon in a non-binding manner in order to continue contract negotiations in an easy and simple way. A contract draft is a preparation to the main contract and also do not bring any obligation to the parties, since the parties are not willing to be bound by it. Contract drafts and letter of intent are very similar concepts in this aspect. Even if there is no explicit difference between them, contract drafts are established multilaterally in general while the letter of intent is usually established unilaterally in the very beginning and submitted to the other party.
3.4 Differences between Gentlemen’s Agreement and Letter of Intent
The last institution that we will assess is the gentlemen’s agreement. The most specific feature of the gentlemen’s agreement differing it from the other concepts is that gentlemen’s agreement can only be resulted in responsibility relating to morality, honor and ethics. Gentlemen’s agreement can only be resulted in ethical responsibility and thus it cannot be a subject to the enforcement of one party to another. In other words, gentlemen’s agreement is an agreement, which does not put the parties under any legal obligation and it only points out the words of honor10. Gentlemen’s agreements and letters of intent are considered similar in terms of non–bindingness of them, however, they differ from each other in terms of the concept that they stem from.
4. BINDINGNESS OF THE LETTER OF INTENT
The letters of intent are not regulated in our legal system. Nonetheless, the dominant view in the doctrine suggests that letters of intent are not binding. In other words, the letters of intent may not cause any sanction in terms of expression of the matters stipulated in the letter as it does not oblige parties to continue with the contract negotiations or to conclude the contract. The parties may contemplate a situation, which they are already in and the issues to be regulated in detail regarding the legal structure planned to be established11. Even if the letter of intent is accepted by the other party, it may still not be binding for the parties. The decision of 13th Chamber of Council of the State numbered 2009/333 and dated 04.03.2011 is also in this direction12.
As mentioned above, a letter of intent cannot be determined as an offer, because it does not contain all the essential components of a contract or even if it does, the parties are not willing to be bound by their statements therein. It can only be accepted as an invitation to offer by the virtue of the fact that each party expresses their intention to conduct or to continue with the contract negotiations by providing non-binding statements or by leaving the essential elements of the contract incomplete or out.
According to the principle of freedom of contract, parties can bring bindingness to the letter by declaring their will to be bound by it, explicitly in the letter of intent, even if the letters of intent are accepted as non-binding by the dominant view in the doctrine. Additionally, several binding provisions can be contemplated in the letter such as the matter of applicable law and dispute settlement and termination and confidentiality. However, one should not interpret this as the letter of intent is binding as a whole, even if it contains several binding provisions. Parties can avoid any doubts that can occur in interpreting the letter by inserting one or more clauses indicating non-bindingness and non-establishment to the letter13. This insertion of clauses is especially important for letters of intent that covers the essential components of the contract. These provisions are called as “non-binding clause” in Anglo-American legal system and as the provisions omitting the bindingness, in Turkish legal system. In addition, even if there is no explicit statement stipulating the letters’ non-bindingness, an expression of “subject to contract” can be deemed as reservation for the non-bindingness of the letter of intent14.
5. LEGAL CONSEQUENCES
In the light of aforementioned explanations, the letters of intent do not impose any legal obligation to the parties since the parties are not willing to be bound by the provisions therein. However, this does not mean that the parties are not able to benefit from any legal protections. It is possible that an obligation may arise from a relationship between the parties as a result of parties’ declarations of their intention to conclude a contract, although there is no contractual relationship between them. The legal consequences of this relationship can be associated with acting without authority, culpa in contrahendo, unjust enrichment and tort as the case may be.
5.1. Acting without Authority
Acting without authority is an act of an agent in line with the benefit or assumed will of another with the intention of carrying on other’s business15. Acting without authority is stipulated as “The agent acting without authority on behalf of another’s interest is obliged to act in accordance with the interest and assumed consent of such” in article 526 of the TCO. As to the explanation of Cem Dinar regarding acting without authority, in scope of letter of intent, it is stipulated as “The addressee of the letter of intent is in position of acting without authority by fulfilling obligations related to the preparation phase in fields apart from main performance obligation. Therefore, in agreements related to the preparation phase, it is also important for the addressee whether or not to have a legal right in case of indulging the addressor. In this manner, taking into consideration of acting without authority, and especially genuine acting without authority is in question…”16.
5.2. Culpa in Contrahendo
Culpa in contrahendo, in other words misconduct during the contract negotiations, imposes parties some obligations arising from good faith during the contract negotiations. The party who expresses the issues that he is not supposed to express, misinforms the other, does not show sufficient attention and care, joins contract negotiations without having the purpose of entering into a contract in the end or harms the other party because of sustaining the negotiations, is obliged to compensate the damages of the other party given the principle of good faith17. It should be noted that the liabilities arisen out of Culpa in contrahendo result in indemnification of the other party not awarding the specific performance. In the light of abovementioned explanations, the letter of intent is composed of statement of intention for the issues regarding the contract, which will possibly be con-cluded between the parties who have not executed any contract yet. By preparing letter of intent, parties state their intentions but not commitments regarding the contract planned to be drafted and may be concluded in the future. Even if there are no binding provisions for the parties in scope of contract negotiations, they may still be under certain obligations based on Culpa in contrahendo. Therefore, if necessary, a party will have the chance to ask for indemnification arisen out of the other party’s misconduct by relying on culpa in contrahendo.
5.3. Unjust Enrichment
Unjust enrichment can be defined as decrease in one’s assets while other’s assets are increasing without any valid ground and causation. In this manner, there should be no valid legal relationship between the parties in order to apply the provisions of unjust enrichment. Accordingly, it can be mentioned that obligations of the parties of the letter of intent may arise out of unjust enrichment. One party may enrich the other party by acting in accordance with the opinion of that they shall conclude a contract even if the letter of intent is not binding. The parties can perform in line with the possible relationship even though there is no valid obligatory relationship during this period. In case that the underlying expectations of the enrichment fail, the enrichment is deemed groundless at the very the beginning18 and returning the enrichment will emerge according to the provisions of unjust enrichment.
5.4. Torts
A tort liability arises when one damages another with an illegal act or omission. The elements of tort are illegal act, damage, causation and omission. Lack of one of these elements prevents the parties to claim the tort liability. When we look at the elements of the tort liability, in order to claim tort liability the party first drafting the letter of intent has to draft the letter with the purpose of damaging the other. The other party has to suffer from a concrete damage and there should be causation between the damage and letter of intent. In this respect, all the elements of the tort have to be proven in order to claim a tort liability by non-binding letter of intent. It will be more appropriate and beneficial to claim Culpa in contrahendo due to the difficulty of proving the mentioned. However, abandoning the contract negotiations by the party drafting the letter of intent cannot be interpreted as damaging the other party and this should not be re-sulted in tort liability. Yet, the matter causing tort liability is not abandoning the contract negotiations, but rather it is to continue the contract negotiations despite the lack of such intention19.
6. CONCLUSION
The letters of intent are non-binding documents in which parties declare their intentions regarding a contract that may be concluded through the contract negotiations. The letters of intent are not binding and thus does not oblige the parties in terms of entering into the contractual relationship due to the fact that the parties do not undertake to make a contract with each other in the future and thereby they just express their intentions. Some provisions having the force of bindingness such as applicable law, dispute settlement, termination and confidentiality do not make the whole document binding. However, one should note that in case of meeting with the necessary conditions, some liabilities of the parties such as acting without authority, unjust enrichment, Culpa in contrahendo or tort may arise, depending on the aforementioned framework of the letters of intent.
BIBLIOGRAPHY
İsmail G. Esin and S. Tunç Lokmanhekim, Uygulamada Birleşme ve Devralmalar, Istanbul: Beta, 2003.
Necip Kocayusufpaşaoğlu, Borçlar Hukukuna Giriş, Hukuki İşlem, Sözleşme, Istanbul: Filiz, 2010.
Cem Dinar, Niyet Mektubunun Hukuki Niteliği ve Bağlayıcılığı, Istanbul: Vedat, 2008.
M. Kemal Oğuzman and Nami Barlas, Borçlar Hukuku Genel Hükümler Volume-I, Istanbul: Vedat, 2012.
Orhan Eroğlu, “Niyet Mektuplarının Hukuki Niteliği”, Ankara Barosu Dergisi, 2014/2.
Hasan Ayrancı, Ön Sözleşme, Istanbul: Yetkin, 2006.
Fikret Eren, Borçlar Hukuku Genel Hükümler, Ankara: Yetkin, 2015.
Safa Reisoğlu, Türk Borçlar Hukuku Genel Hükümler, Istanbul: Beta, 2014.
Gül Doğan, Ön Sözleşme (Sözleşme Yapma Vaadi), Istanbul: Yeditepe Üniversitesi, 2006.
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FOOTNOTE
1 It is published in the Official Gazette dated 04.02.2011 and numbered 27836 and entered into force at 01.07.2012.
2 Necip Kocayusufpaşaoğlu, Borçlar Hukukuna Giriş, Hukuki İşlem, Sözleşme, (Istanbul: Filiz, 2010), 111.
3 Cem Dinar, Niyet Mektubunun Hukuki Niteliği ve Bağlayıcılığı, (Istanbul: Vedat, 2008), 5.
4 Fikret Eren, Borçlar Hukuku Genel Hükümler, (Ankara: Yetkin, 2015), 244.
5 Safa Reisoğlu, Türk Borçlar Hukuku Genel Hükümler, (Istanbul: Beta, 2014), 65, Eren, Borçlar Hukuku Genel Hükümler, 246.
6 Orhan Eroğlu, “Niyet Mektuplarının Hukuki Niteliği”, Ankara Barosu Dergisi (2014/2): 517- 531.
7 M. Kemal Oğuzman ve Nami Barlas, Borçlar Hukuku Genel Hükümler Volume-I, (Istanbul: Vedat, 2012), 192.
8 Gül Doğan, “Ön Sözleşme (Sözleşme Yapma Vaadi)”, (Istanbul: Yeditepe Üniversitesi, 2006), 36.
9 Kocayusufpaşaoğlu, Borçlar Hukukuna Giriş, Hukuki İşlem, Sözleşme, 112.
10 Hasan Ayrancı, Ön Sözleşme, (Istanbul: Yetkin, 2006), 95, Kocayusufpaşaoğlu, Borçlar Hukukuna Giriş, Hukuki İşlem, Sözleşme, 111.
11 Esin ve Lokmanhekim, Uygulamada Birleşme ve Devralmalar, 11.
12 “The letter of intent is an element of the contract negotiations, as indicated in doctrine, and intention to enter into a contract which its context is determined insufficiently or sufficiently is stated in this kind of letter. In order to reach this result, the serious continuity with the negotiations is undertaken. However, this commitment may not be binding even if the other party adopts and accepts it and may not oblige the parties to enter into a contract. Letters of intent which do not have the bindingness neither oblige the parties to initiate the contract negotiations and nor enter into a contract.”
13 Kocayusufpaşaoğlu, Borçlar Hukukuna Giriş, Hukuki İşlem, Sözleşme, 111.
14 Dinar, Niyet Mektubunun Hukuki Niteliği ve Bağlayıcılığı, p. 63.
15 Eren, Borçlar Hukuku Genel Hükümler, p. 605.
16 Dinar, Niyet Mektubunun Hukuki Niteliği ve Bağlayıcılığı, p. 93
17 Oğuzman and Barlas, Borçlar Hukuku Genel Hükümler Volume-1, p. 408.
18 Dinar, Niyet Mektubunun Hukuki Niteliği ve Bağlayıcılığı,p. 134.
19 Süleyman Yalman, Türk-İsviçre Hukukunda Sözleşme Görüşmelerinden Doğan Sorumluluk, (Ankara: Seçkin, 2006), p. 90.
