When the process is delayed, even unintentionally, this doubt can severely erode trust between the parties. It is important to remember that a Letter of Intent (LOI) is, in principle, not a binding contract. It is generally referred to as non-binding. However, certain terms, of varying strength, can be added to make it more restrictive.

Down Payment

When the amount is paid directly to the seller, it is considered a down payment, and the sale is presumed to be completed. While this practice is commonplace in real estate transactions, the use of a down payment is fairly rare in business transfers. In the event of a dispute, recovering this sum can prove difficult. Furthermore, at the LOI stage, there are often still conditions precedent that prevent making a firm commitment.

Establishment of a Guarantee 

This also involves holding funds, but this time in the hands of a third party (notary, bank, etc.). Establishing a guarantee provides greater peace of mind regarding the potential recovery of the held funds, particularly if a condition precedent is not met. In the case of a bank, a distinction must be made between a traditional blocked account—as used, for example, for a rental deposit—and an escrow account, where the third-party guarantor assumes specific contractual obligations. Drafting the escrow agreement must be done carefully, as it will govern any potential conflicts between the parties.

Penalty Clause 

The LOI can provide for the payment of a lump-sum amount if one of the parties fails to fulfill its contractual obligations. Although proving the faulty non-performance of the counterparty is difficult in practice, this clause often serves as a deterrent. Note that a judge may reduce the amount of the penalty clause if they consider that it "manifestly exceeds" the actual damage suffered (Art. 1231 of the Civil Code).

Break-Up Fee Clause 

This clause is fairly similar to the penalty clause, except that it is framed in reverse. Upon payment of a lump-sum amount, the buyer or the seller may withdraw from the deal. When the amount is low, this type of clause obviously does not reassure the other party. Beware also of an abuse of rights, where a party imposes new conditions not provided for in the LOI in an attempt to trigger the break-up fee clause and claim the indemnity.

Specific Performance or Rescission with Damages 

The principle of choosing between one of these remedies is established by Article 1184 of the Civil Code, which governs all bilateral contracts (contracts in which the parties assume reciprocal commitments). This clause is frequently included in real estate purchase agreements and also in certain Letters of Intent for business transfers. However, it should be noted that obtaining the forced transfer of a business is delicate given that third parties (employees, clients, suppliers, etc.) are involved. 

Inserting such a clause—possibly replacing damages with a fixed penalty clause—can nevertheless act as a deterrent. When the non-performance relates to the payment of the price or part of the price, the court may order the buyer to pay the sum due under penalty of a periodic penalty payment. A provisional seizure of the buyer's private assets can then be considered, putting the defaulting party in an uncomfortable position.

Contrary to what one might think, a Letter of Intent can therefore perfectly well contain certain firm commitments. And even when there is no specific clause ensuring successful completion, the principle of good-faith performance of contracts still applies. Consequently, a party that manifestly fails to honor its commitments risks being sued for liability and having to compensate the damages caused to the counterparty by its negligent behavior. The clauses discussed above, however, allow parties to anticipate this situation and minimize its occurrence. Indeed, it is better to think carefully in advance and commit wisely. 

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