The Hidden Duty in ‘Non-Binding’ LOIs: Negotiating in Good Faith” 

 This implied covenant of good faith and fair dealing means that a party cannot simply decide to walk away but must in good faith negotiate to make the deal stated in the LOI.

The classic illustration is the case of Copeland v. Baskin Robbins U.S.A. In that case, Copeland sought to purchase an ice cream manufacturing plant from Baskin Robbins. But the deal required more than just buying the facility itself; Copeland wanted a separate “co-packing agreement” in which Baskin Robbins would agree to buy ice cream produced at the plant under negotiated pricing and terms. The parties signed a letter of intent that spelled out certain basic deal points but expressly stated that the sale was subject to the successful negotiation of that separate co-packing agreement.

Negotiations over the co-packing terms went on for some time before Baskin Robbins abruptly terminated discussions, explaining that the co-packing concept no longer fit its business strategy. Copeland sued. The California Court of Appeal agreed there was no binding sale contract, recognizing that the LOI by its own terms made completion conditional on future agreement. However, it held that the LOI nonetheless created an enforceable obligation to negotiate in good faith over the co-packing terms. The court explained that California law allows parties to enter an agreement to negotiate specific terms in good faith, even if the ultimate deal remains incomplete. The implied covenant of good faith and fair dealing attaches to such an agreement and obligates each party to avoid undermining the purpose of the negotiations.
The court in Copeland noted that parties are not compelled to ultimately agree to the other’s proposed terms and they can reject proposals they find unacceptable. But they must participate honestly and reasonably in the negotiation process. A party cannot deliberately stall or mislead the other side, impose unreasonable new conditions purely to sabotage the deal, or walk away for pretextual reasons after inducing substantial reliance.

The court in Copeland ruled that Copeland could not recover the profits he would have earned under the unconsummated co-packing agreement since no final deal was reached and these damages were too speculative. Instead, the court held that Copeland was entitled to reliance damages: compensation for the out-of-pocket costs he incurred in preparing for and participating in the negotiations, such as attorney’s fees, due diligence expenses, costs associated with business planning, and potentially the opportunity cost of foregoing other transactions.

So, in the case of breaching a final, enforceable contract, a party can be liable for expectation damages designed to put the other side in the position it would have occupied had the deal closed. But in breaching an agreement to negotiate in good faith, the breaching party is only responsible for the actual costs the other party incurred in reliance on the expected good-faith process. While these damages are generally smaller, they can still be substantial, especially in sophisticated commercial real estate transactions involving legal, environmental, and financial due diligence.

While California has confined such damages to reliance losses, other jurisdictions have gone further. Delaware courts, for example, have awarded expectation damages—the full benefit of the bargain—when a party was found to have breached a duty to negotiate in good faith. This risk can arise if a letter of intent contains a Delaware choice-of-law clause or if one of the parties is a Delaware entity.

So, simply labeling an LOI “non-binding” is not enough to fully protect against liability. Parties may seek to include disclaimers that there is no obligation to negotiate in good faith, though courts may or may not enforce such disclaimers depending on the context.  LOIs can also specify that each side incurs its own costs at its own risk, and that no reimbursement obligation exists absent a final signed agreement. But drafting alone is not enough. Parties must ensure their actual conduct remains consistent with their disclaimers, maintaining transparency and avoiding misleading signals about the likelihood of a deal.  Being aware of these risks, and taking thoughtful steps to address them in both drafting and conduct, is essential to avoiding costly disputes.