What follows is our general observations and opinions, not legal advice and not a definitive statement of California law. Whether a particular letter of intent or term sheet is binding always depends on its specific language and the parties’ conduct, not on the label at the top of the page.
You signed a letter of intent or a term sheet that says “non-binding” in bold at the top, and now the other side is treating part of it as an enforceable deal. Our short answer is that the label does not control — a document can say “non-binding” and still create real, enforceable obligations for specific provisions the parties intended to be binding regardless of whether a final agreement is ever signed. The question is not whether the document says non-binding. It is which of its individual provisions were actually meant to bind, and whether the parties’ conduct after signing backed that up.
This is one of the more common ways a business ends up in a dispute it did not see coming, because the document was drafted, and often signed, with the assumption that “non-binding” at the top settled the question.
Why the Heading Does Not Settle It
Our reading of California contract law is that courts look at the parties’ objective intent as expressed in the document as a whole, not just a label. A letter of intent that says it is non-binding “except as expressly provided below,” and then lists specific binding provisions — confidentiality, exclusivity, a no-shop period, expense allocation, governing law — has, in our view, created exactly what it appears to have created: a binding contract as to those listed items, wrapped inside a document that is otherwise a statement of preliminary intent about the larger deal.
The provisions most commonly drafted to survive as binding, whether or not the larger transaction ever closes, include:
- Confidentiality obligations covering information exchanged during negotiation.
- Exclusivity or “no-shop” clauses preventing a party from negotiating with others for a defined period.
- Allocation of who pays for due diligence costs, appraisals, or professional fees if the deal falls apart.
- Governing law and dispute resolution provisions.
- In some drafting, a break-up fee or reimbursement obligation if one side walks away without cause.
The Good-Faith Negotiation Trap
A separate and less obvious risk is a clause requiring the parties to negotiate the definitive agreement “in good faith.” Our reading is that California courts have enforced good-faith negotiation obligations where the language is specific enough to be more than an agreement to agree — meaning a party who walks away from the table for reasons unrelated to the actual deal terms, or who negotiates in a way found to be pretextual, can face a claim for breach of that obligation, even though no final purchase agreement, lease, or services contract was ever signed. This is a narrower doctrine than a full breach-of-contract claim over the ultimate deal, but it is real, and it surprises people who assumed “non-binding” meant no exposure at all.
How Conduct Can Undo the “Non-Binding” Label
Even where a letter of intent is drafted cleanly as fully non-binding, conduct after signing can create separate obligations the document itself never intended. If one party begins performing as though the deal were final — moving forward with construction, hiring for the anticipated transaction, making payments consistent with closing — a court may look past the label to what the parties actually did. This does not automatically create a binding contract, but it is the kind of fact pattern that turns a clean “we never had a deal” defense into a genuinely contested question of fact, which is expensive to litigate regardless of who ultimately wins.
What This Looks Like in Practice
We see this most often in three settings: a business sale where the buyer and seller sign a term sheet, begin due diligence, and one side pulls out after the other has already incurred real costs; a commercial lease letter of intent where a landlord takes the space off the market in reliance on the LOI and the tenant later walks; and a vendor or services relationship where a term sheet’s exclusivity period is used to freeze out a competing bid while the “non-binding” deal quietly stalls. In each of these, the dispute is rarely about the overall transaction — it is about the specific binding carve-outs, or about whether conduct created obligations the document did not.
What to Do Before You Sign One
Read every provision, not just the heading, and identify exactly which ones are carved out as binding. If you are not comfortable with an exclusivity period, a cost-allocation clause, or a good-faith negotiation obligation, negotiate those specifically — they are usually the parts that matter most if the deal falls through, and they are usually the shortest paragraphs in the document. If you want the document to be genuinely non-binding in every respect, say so expressly and remove the carve-outs, rather than relying on a general heading to do that work. And if you are the party walking away, keep a record of the actual business reasons for doing so — it is the best defense against a later good-faith claim.
What This Means for You
Treat a letter of intent or term sheet as a contract in miniature, not as a formality on the way to the real agreement. The provisions carved out as binding are frequently the ones that end up litigated, precisely because everyone assumed the “non-binding” heading covered the whole document.
We review and negotiate letters of intent and term sheets on an hourly or flat-fee basis. If you are about to sign one, or already have a dispute over what one of these documents actually obligates you to do, call us at (310) 556-9692.
Related reading: for the lease-specific version of this issue, see what to negotiate in a commercial lease letter of intent. For when an agreement needs to be in writing at all, see which California contracts must be in writing. And for one of the binding provisions that often shows up inside these documents, see what an indemnification clause actually commits you to. For the full set of contracts resources, visit our contracts page.
This article reflects our general views on a recurring drafting issue and is not a substitute for advice about your specific letter of intent or term sheet. Reading it does not create an attorney-client relationship between you and this firm.
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