Current to July 17, 2026
A letter of intent (LOI) is often where you and the other side set the direction of an Ontario business deal. But it isn't automatically the final deal.
- Whether it binds you depends on what you actually wrote, not just the label on the page.
- Some parts, like exclusivity, confidentiality, costs, and which province's law applies, are usually meant to bind right away.
- Other parts, like price and closing date, are usually meant to stay open until a final agreement is signed.
Settle price, deal structure, price adjustments, conditions, and who takes on which risks as early as you can. Write the binding parts, like exclusivity, confidentiality, cost-sharing, and governing law, so there's no doubt about their status.
- An LOI can be entirely non-binding, entirely binding, or (most often) binding only for a few specific parts.
- Courts look at what a reasonable person would understand from your words and actions. Calling something "non-binding" doesn't save you if the rest of the document says otherwise.
- Exclusivity clauses should name their scope, start date, end date, what the seller is still allowed to do, and any way to extend the deadline.
- Confidentiality clauses should cover how information can be used, shared, handed over if legally required, and returned or destroyed.
- Say clearly whether the deal is a share purchase or an asset purchase, and note any tax, consent, or approval steps that assumption depends on.
- Spell out how the price actually works: cash, debt, earn-outs, holdbacks, working capital, and who pays the deal costs.
- Conditions should be specific, have a deadline, and come with a clear right to walk away, not just a vague sense that closing will probably happen.
- Even in a non-binding deal, once you're performing a binding obligation, you still have to deal honestly with the other side.
Why the LOI Is the Real Negotiation
The LOI is often the most important moment in the whole deal. That's not because every term becomes locked in stone. It's because this is the point where you and the other side agree on the deal's basic shape, while the seller still has other options. Once the buyer starts digging through the seller's books and an exclusivity clause kicks in, the buyer often picks up more information and more leverage.
The final purchase agreement still matters a lot. Promises about the business, protections if something goes wrong, ongoing duties, closing steps, and what happens if things break down are not small details. But here's the practical point: don't put off a real money issue or a real risk just because the LOI feels preliminary. If it matters, deal with it now, while you still have room to negotiate.
Which Parts of an LOI Usually Bind You, and Which Don't
Some things are usually meant to stay non-binding. These include the deal itself, the headline price, the rough structure, expected financing, the plan for digging into the business, the target closing date, and the conditions that have to be met first. This only works if the LOI clearly says that no one has to complete the deal until a final agreement is signed and handed over.
Other things are often meant to bind you right away. These include exclusivity (also called a "no-shop" clause), confidentiality, who can access information and what they can do with it, how any announcement is handled, and who pays the costs. They also often include which province's law applies, where a dispute would be heard, returning or destroying documents, and sometimes a promise not to solicit the other side's staff or customers. The LOI should list every binding clause by name. It should say that everything else is non-binding. It should also say whether any binding clause survives if the deal falls apart.
Courts Look at What You Actually Wrote and Did
Ontario courts ask what a reasonable person would understand from your words and your conduct, read together. A document called an "LOI," "term sheet," or "memorandum" can still create real obligations if the wording shows you meant to be bound. On the other hand, a document full of detailed terms can still be non-binding if it clearly says you're holding off on a legal commitment until the final agreement is signed. Don't send mixed signals. Don't write "subject to contract" in one paragraph and "the parties agree to sell and purchase" in another without explaining which one wins.
In Wallace v. Allen, a 2009 Ontario Court of Appeal decision, a business owner planning to retire signed a letter of intent to sell his company. After signing, he told his staff he was retiring and introduced the buyer as the new owner. The buyer started working in the business every day to learn the ropes. When the closing date arrived, the buyer was out of town (with the seller's knowledge), and the seller refused to go ahead with the deal. The court found the letter and the way both sides had acted afterward added up to a binding agreement, even though a further document was expected later. The lesson isn't that every LOI is binding. It's that a label like "letter of intent" and a promise of a future contract have to be checked against the document as a whole, and against how both sides actually behaved.
Exclusivity and Confidentiality: Protecting the Deal While You Check the Business
A buyer often wants time to check out the business without worrying the seller will quietly shop the deal to someone else. A seller shouldn't hand over the market with no end date. A good exclusivity clause spells out exactly what's off-limits: asking around, negotiating, sharing information, or accepting another offer. It should also say what's still allowed, who has to be told if something changes, who the clause covers, and when it expires. Consider tying any extension to the buyer hitting real milestones, rather than letting the clock reset automatically. Also decide what happens if someone breaks the clause: damages, a court order stopping the other side, or a break fee. Don't leave the consequences unwritten.
Confidentiality should cover the seller's business information and the fact that talks are happening at all. Name who's allowed to see the information, and why. Say what security standards apply, and what happens if someone is legally forced to disclose it. Say who's responsible for advisors and other people involved, and what happens to the information afterward, whether it's returned or destroyed. If a confidentiality agreement already exists from earlier talks, say whether it keeps going, gets changed, or gets replaced. A vague confidentiality sentence may still count as "binding," but it can be weak protection for trade secrets, which usually need real, active steps to stay secret, not just a promise on paper.
Picture an Ontario manufacturer that agrees to a 30-day no-shop clause. In exchange, the buyer has to send its information requests within three business days and its first draft purchase agreement within ten days. The seller's board can still respond if the law requires it to, and the seller must promptly report any unsolicited offer that comes in. If the buyer misses a milestone, exclusivity ends automatically. None of this guarantees the deal will close. It does mean the seller's temporary loss of options is limited, measurable, and tied to the buyer actually moving the deal forward.
Say Whether It's a Share Sale or an Asset Sale
In an asset sale, list which assets and debts are included, and which are excluded. Say how receivables and inventory are handled, what consents are needed to transfer contracts, and what happens with employees, leases, and sales tax. In a share sale, identify the shares being sold, any assumptions about the company's share structure, what shareholder approval is needed, and whether any seller is rolling equity into the new ownership. Ontario's Business Corporations Act has a rule for big asset sales. If a company sells, leases, or trades away all or nearly all its property outside its normal business, shareholders must approve it by a special vote. They also must get proper notice, and shareholders who disagree have the right to be bought out.
A seller came to us after signing an LOI on an earlier deal, drafted with different advisors. That LOI covered price and exclusivity but said nothing about the size of the holdback held back after closing, or how long the seller would stay on the hook if something went wrong. By the time the purchase agreement was drafted, the buyer's lawyers had filled in an 18-month period and a holdback well above the going rate, and pointed out, correctly, that nothing in the signed LOI said otherwise. The seller had already spent their negotiating leverage agreeing to the headline price, so there was little room left to push back on the holdback terms.
Headline Price Is Not the Same as What You'll Actually Get
The number in the LOI is rarely the number you walk away with. State whether the deal is a share sale or asset sale, and what actually makes up the payment: cash, debt, rollover equity, a vendor note, an earn-out, or a holdback. Say whether the price is meant to be "cash-free, debt-free." Set a target for working capital, and say which accounting rules apply. Say what happens if those rules conflict, how the estimate gets made, and how it gets adjusted after closing. Say how disputes get resolved, and who pays the deal costs. If any of this is still undecided, say so plainly. Don't let open questions look like settled agreement.
Picture a software company that receives a "$12 million" offer. The revised LOI says the price is cash-free and debt-free. It sets a normal working-capital target based on an agreed prior period. It defines exactly what counts as debt and deal expenses. And it caps any earn-out with clear, objective revenue rules and a right to see the company's reports. The final number still depends on further review and the final agreement. But now both sides can see exactly what would change the amount actually paid, both at closing and afterward.
Conditions, Good Faith, and Honest Dealing
The Supreme Court of Canada has confirmed that Canadian contract law includes a general duty of honesty in how people carry out their contracts (Bhasin v. Hrynew, 2014). A later decision confirmed that parties can't knowingly mislead each other about how a contract is being carried out (C.M. Callow Inc. v. Zollinger, 2020). These duties apply to obligations that are actually binding. They don't turn a clearly non-binding proposal into a promise to close, and they don't force anyone to give up their own interests.
Even where nothing forces you to complete a deal, once you're carrying out a binding promise, like exclusivity or confidentiality, you still have to deal honestly with the other side.
Five Common Mistakes
- “Calling the LOI non-binding, then writing operative promises that say the opposite.”
- “Giving up exclusivity with no expiry date, no milestones, and no clear scope.”
- “Locking in the headline price while leaving working capital, debt, and expenses undefined.”
- “Using vague conditions that let one side move the goalposts after digging into the business.”
- “Assuming good faith creates a duty to close a deal the LOI clearly leaves non-binding.”
Ontario FAQs
It depends. Courts look at what the whole document says and how the parties acted, not just the label on the page. Spell out which clauses bind, which don't, and say clearly that no one has to close the deal until a final agreement is signed.
Usually not, if a binding no-shop clause says they can't. It depends on the exact wording, including whether it allows the seller to receive an unsolicited offer or respond where the board has a legal duty to do so. Get advice before talking to another buyer.
At minimum, agree on the idea, the measurement date, the accounting method, how the target will be set, and how disputes get resolved. An exact number can often wait until the financial review is done.
Not necessarily. It depends on the wording, how much discretion it gives the buyer, the deadlines, any effort requirements, and how the LOI describes its binding status. Spell out the condition and the right to walk away in clear terms.
Generally, Ontario's Electronic Commerce Act, 2000 recognizes electronic signatures and contracts formed electronically, with some exceptions. Signing online does not fix vague terms or unclear intentions in the document itself.
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This article gives general information about Ontario and Canadian law, current to July 17, 2026. It is not legal, tax, accounting, or investment advice, and it doesn't replace advice about your specific situation. Reading it doesn't create a lawyer-client relationship. Laws and practices change. Get advice from a qualified Ontario lawyer and your tax and financial advisers before signing or relying on an LOI, or before completing a transaction.
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