Is a Letter of Intent Binding in California When the Other Side Walks Away?

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

A letter of intent is binding in California only to the extent the parties meant it to be, and courts look first to the document's own words. (Civ. Code, §§ 1636, 1639.) Most LOIs leave the deal non-binding but make exclusivity, confidentiality, and sometimes good faith negotiation enforceable. If a seller walks away for a better offer, the buyer's claim usually rests on those terms, and recovery is often limited to reliance costs. Kolmogorov Law, P.C. litigates these disputes in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss a deal that fell apart after a signed letter of intent or term sheet.

What a letter of intent is, and why the label decides nothing

A letter of intent, term sheet, memorandum of understanding, or deal memo records where a negotiation stands. Buyers and sellers sign them before spending money on due diligence and advisers. The title on the first page does not answer whether the document binds anyone.

Intent does. A contract requires consent, along with capable parties, a lawful object, and consideration. (Civ. Code, § 1550.) So the question is whether both sides agreed to be bound now, or only once a definitive agreement was signed. Where a writing calls its terms a general understanding to be turned into a formal contract later, courts generally treat it as preliminary. A two-page letter that states the price, the assets, and the closing date, with no reservation, may be enforced as the contract.

Read the document for three things: a sentence saying it is non-binding, a list of exceptions to that sentence, and any condition such as board approval, financing, or satisfactory due diligence.

The parts of an LOI that usually bind

Even a letter marked "non-binding" almost always carves out a few paragraphs.

Exclusivity, also called a no-shop: the seller agrees not to solicit or negotiate with other buyers for a set number of days.
Confidentiality: each side agrees not to use or disclose what it learns in due diligence.
Expenses and break-up fees: who pays the advisers if the deal dies, and whether a fee is owed.
A promise to negotiate the definitive agreement in good faith.

Each of these can stand as its own enforceable promise. A seller that signs a 60-day no-shop and opens talks with a rival bidder in week three has likely breached a contract, whatever the rest of the letter says. Confidentiality terms are covered on our page about breach of an NDA.

An agreement to agree is different from a contract to negotiate

California courts have long refused to enforce a bare "agreement to agree." If the price or another essential term is left for later agreement, there is usually nothing for a court to enforce. An agreement whose terms are not sufficiently certain also cannot be specifically enforced. (Civ. Code, § 3390, subd. (e).) So a buyer rarely gets an order forcing the sale.

A contract to negotiate is a separate thing. The Court of Appeal has held that it can be formed and breached like any other contract. (Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251.) The obligation is to bargain. A good faith failure to reach a deal is not a breach, and a party is liable only when the deal failed because it refused to negotiate or negotiated in bad faith.

The same decision limits the remedy. Damages are measured by what the plaintiff lost in relying on the promise to negotiate, such as the out-of-pocket costs of the negotiation. Profits expected from the deal that was never signed are not recoverable on this theory, because nobody can know what the final terms would have been.

If you are the buyer and the seller took a better offer

Start with the calendar. Was the exclusivity period still running when the seller began talking to the other bidder?

The claims I evaluate, roughly in order of strength, are these. Breach of the no-shop, if one was in force. Breach of an express duty to negotiate in good faith. Promissory estoppel, where the seller made a clear promise outside the letter and you spent money because of it. Fraud, where the evidence shows the seller never intended to close and used your offer only to raise another bidder's price. A claim against the rival bidder for interference with contract is possible when it knew of a binding exclusivity term, though those claims are harder to prove.

Expect the damages fight to center on reliance: diligence costs, legal and accounting fees, and financing commitment fees. Whether opportunities you passed up also count was left open in that decision.

If you are the party who ended the talks

A seller or buyer who walks away is usually within its rights. Parties under no contractual duty to negotiate may generally stop for any reason, including a better price elsewhere.

The defense file has a familiar shape. The letter said it was non-binding. The exclusivity window had closed, or was never signed. A stated condition, such as financing or diligence satisfactory to the buyer, was not met. And the plaintiff's claimed damages are lost profits on a deal that never existed.

One caution. Conduct after signing can undercut the non-binding label. A party that announces the deal, takes a deposit, or begins transferring customers gives the other side an argument that a contract was formed by performance. Our page on implied contracts explains how conduct is used that way.

Deadlines and where these cases are heard

A claim on the signed letter is generally subject to the four-year period for written contracts. (Code Civ. Proc., § 337, subd. (a).) Contract claims resting on oral promises generally fall under the two-year period. (Code Civ. Proc., § 339, subd. 1.)

Most LOI disputes between California parties are filed in superior court, in a county tied to the defendant or the contract. In Orange County that usually means the Central Justice Center in Santa Ana, and in Los Angeles the Stanley Mosk Courthouse. If the letter has a forum or arbitration clause among its binding terms, that clause usually controls where the case goes.

Disputes after a definitive agreement is signed are covered on our page about breach of a business purchase agreement.

What to bring to the first meeting

The signed letter of intent or term sheet, with every draft and redline.
Emails and texts with the other side and its broker, from the first contact through the breakup.
Proof of what you spent: adviser invoices, lender fees, travel, and internal time records.
The NDA, if it was a separate document.

Frequently asked questions

Is a letter of intent legally binding in California?

Only as far as the parties intended. California courts read the document as a whole to decide whether the signers meant to be bound immediately or only after a definitive agreement. Many letters of intent are non-binding on price and structure but binding on exclusivity, confidentiality, and expenses. A letter with all essential terms and no reservation can be enforced as a contract.

We signed a letter of intent to buy a company and the seller walked away to take a better offer. Do we have any claim in California?

Possibly. If the letter contained an exclusivity or no-shop term that was still in force, the seller's talks with another bidder may be a breach. If it promised good faith negotiation, California recognizes a claim for breach of a contract to negotiate, with damages usually limited to your reliance costs. Lost profits from the unsigned deal are generally not recoverable on that theory.

Is a term sheet binding?

A term sheet follows the same rule as a letter of intent in California. Courts look at whether the document says it is non-binding, which paragraphs are excepted, and whether essential terms were left open. Term sheets commonly bind only on confidentiality, exclusivity, and costs.

The other side says our letter of intent was non-binding, but we already paid for due diligence and turned down another buyer. Can we recover those costs?

Sometimes. In California, reliance costs may be recoverable if the letter contained a binding duty to negotiate in good faith or an exclusivity term that was breached. A clear separate promise you reasonably relied on can support the same recovery. If the letter was entirely non-binding and nothing more was promised, each side usually bears its own costs.

Can a court force the seller to complete the sale under an LOI?

Rarely. Specific performance in California requires terms certain enough that the court can tell what must be done, and most letters of intent leave key terms for the definitive agreement. Where the letter is complete and unconditional, a court may treat it as the contract. Otherwise the realistic remedy is money damages.

Talk to a California breach of contract attorney

If a deal collapsed after a signed letter of intent, or you are accused of walking away in bad faith, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents buyers and sellers in deal disputes in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the wording of the letter, the facts, and the court.