Often, when two parties want to explore the idea of working together on a new venture or transaction, they will execute a letter agreement that sets out the general terms of the due diligence or other exploratory work that will be performed to determine the viability of the venture or transaction. A well-drafted letter will include a clause in which the parties acknowledge and agree that, notwithstanding the initial work to be performed and discussions between the parties, neither is legally bound to consummate the deal unless and until they execute a definitive agreement that sets out the complete terms of the proposed venture or transaction. Yet, during the interim period, it is not uncommon for the parties to reach agreements in principle on key terms and/or work closely together to reach out to third parties to test the viability of the proposed deal. To some extent, the parties, through their course of conduct, may act as though they have reached agreement on the proposed deal, and the question arises whether they have become legally bound to what was supposed to be a non-binding arrangement unless and until certain conditions precedent were satisfied. A recent opinion issued by the Texas Supreme Court squarely answers this question.
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Home Perspectives Texas Supreme Court reaffirms the principle of freedom of contract in the context of partnership formation