Can a Non-Binding Letter of Intent Affect a Final Purchase Agreement? A recent Ontario Court of Appeal decision suggests that the answer to this may be “yes”.
Specifically, in Project Freeway Inc. v. ABC Technologies Inc. (“Project Freeway”),[1] the Court found that a non-binding letter of intent (“LOI”) may still be relevant when interpreting an ambiguous provision in a final purchase agreement, even where that agreement contains an entire agreement clause that expressly supersedes the LOI.
In its arguments, Project Freeway (the “Seller”) relied on the LOI to support its position that share purchase agreement (the “SPA”) earn-out protections were intended to prevent ABC Technologies Inc. (the “Purchaser”) from taking steps that could impair its ability to receive the earn-out.[2] The Purchaser, by contrast, relied on the wording and context of the SPA to argue that the transactions at issue did not trigger the acceleration provision.[3] The decision is particularly relevant to buyers and sellers involved in Ontario private M&A transactions, where LOIs, earn-outs, and entire agreement clauses are common and often key deal features.
What happened in the Project Freeway ONSC decision?
The Seller sold a group of operating companies to the Purchaser under the SPA.[4] Part of the purchase price consisted of earn-out payments of up to US$26.461 million, payable based on the acquired businesses meeting certain financial targets.[5]
The SPA also contained an acceleration provision. If the Purchaser sold a “material portion of the assets of the Business” without the Seller’s consent, the full potential earn-out would become immediately payable.[6] However, the SPA did not clearly define the threshold for “material” and what it represented in different scenarios.
After closing, the Purchaser completed a sale-and-leaseback of certain land and buildings for proceeds of US$97.9 million, together with a factoring arrangement.[7] Neither transaction impaired the acquired businesses’ ability to achieve earn-out targets. However, when the first earn-out target was nevertheless not met, the Seller argued that the transactions triggered the acceleration provision because they involved a “material” portion of the businesses’ assets.
The Purchaser disagreed. It argued that “material” had to be understood in the context of the earn-out provisions and referred to transactions that materially affected the businesses’ ability to achieve the earn-out targets.[8] The LOI became relevant because it reflected the parties’ shared concern that the Purchaser should not take steps that impair the Seller’s ability to earn the earn-out payments; the Seller relied on that theme to support its broader interpretation of the acceleration provision.[9]
The application judge agreed with the Purchaser, and the Seller appealed, which was later dismissed by the ONCA.[10]
Why did the ONCA dismiss the appeal and allow the LOI to be considered?
The ONCA dismissed the appeal and agreed that the phrase “material portion” was ambiguous. In context, “material” could refer either to the size of the assets sold or to the effect of the sale on the earn-out.[11] Since the provision was ambiguous, the Court said the application judge was entitled to consider the surrounding circumstances in determining its meaning. Importantly, the ONCA held that considering the LOI did not offend the SPA’s entire agreement clause, even though that clause expressly stated that the SPA superseded the LOI.[12] The LOI was not used to add to or vary the SPA. Rather, it was used as an interpretive aid to determine what the parties meant by the language already contained in the agreement.[13]
The ONCA also upheld the application judge’s finding that the LOI reflected a consistent theme that the Purchaser should not act in a way that impaired the Seller’s ability to earn the earn-out payments.[14]
What does the Project Freeway decision mean for purchasers and sellers?
Some commentators are calling the decision a blow to deal certainty. In their words, parties include entire agreement clauses precisely so that the negotiation record cannot be mined later. As a result, here are three practical points for parties to keep in mind:
- Treat Non-Binding LOIs as relevant, regardless. A non-binding LOI may still form part of the surrounding circumstances used to interpret ambiguous language in the definitive agreement. Parties should therefore take care when describing important commercial concepts at the LOI stage.[15]
- Define “material” more precisely. If materiality is intended to depend on asset value, revenue, or another measurable threshold, the agreement should expressly define such metrics. If the concern is interference with an earn-out, that should also be stated clearly.
- Revisit the boilerplate. The SPA expressly superseded the LOI, yet the LOI was still considered as an interpretive aid. Parties may therefore wish to consider whether their entire agreement clauses should address the use of prior documents for interpretive purposes, given that courts may well utilize them anyway.
What should purchasers and sellers do moving forward?
Project Freeway does not rewrite Ontario contract law, but it confirms that the LOI is never entirely behind the parties. For sellers planning an exit and purchasers structuring earn-outs, the lesson is to draft the definitive agreement so that the earn-out never has to be interpreted.
Should you have questions about this matter or about structuring a purchase or sale, a member of our business law group would be pleased to assist.
The author would like to thank Derren Forman, Student-at-Law, for his assistance with this article.
[1]Project Freeway Inc. v. ABC Technologies Inc., 2025 ONCA 855 [“Project Freeway ONCA”], affirming Project Freeway Inc. v. ABC Technologies Inc., 2025 ONSC 1048 [“Project Freeway ONSC”].
[2] Project Freeway ONCA, supra note 1 at para 15.
[3] Project Freeway ONSC, supra note 1 at para 46.
[4] Ibid at para 1.
[5] Ibid at para 13.
[6] Ibid at para 2.
[7] Ibid at para 15.
[8] Ibid at paras 43-46.
[9] Project Freeway ONCA, supra note 1 at paras 13-14.
[10] Project Freeway ONSC, supra note 1 at paras 23 and 56.
[11] Project Freeway ONCA, supra note 1 at paras 8-9.
[12] Ibid at para 14.
[13] Ibid.
[14] Ibid at para 15.
[15] See also, Pallett Valo LLP, “LOI (Letter of Intent) – Information and Tips for Sellers” (May 2025), online: https://www.pallettvalo.com/whats-trending/loi-letter-of-intent-information-and-tips-for-sellers/ for another article regarding LOIs for sellers.