Letters of Intent in Ontario: Binding or Not?

A letter of intent, often shortened to “LOI,” is a document used early in a negotiation to set out the parties’ shared understanding of a proposed deal before a full, definitive agreement is drafted and signed. LOIs show up across many kinds of transactions — business acquisitions, commercial real estate deals, partnership discussions, and significant service arrangements among them.

The function an LOI serves is to capture momentum and shared understanding at a point when the parties have agreed on enough to move forward, but haven’t yet worked out every detail a final contract would need. Used well, it narrows the scope of what still needs negotiating and gives both sides a reference point for the deal’s broad shape.

What an LOI is not, however, is a fixed category with one legal effect. Two documents both titled “Letter of Intent” can have completely different legal consequences depending entirely on how each one is actually worded.

LOIs are also sometimes called memoranda of understanding, heads of agreement, or term sheets, depending on the industry and the deal involved. None of these titles carries a fixed legal meaning in Ontario — the same analysis applies regardless of which heading sits at the top of the page, so the label chosen is really a matter of convention rather than legal consequence.

An LOI can be drafted in three broad ways. It can be fully binding, meaning the parties intend to be legally bound by everything in the document, functioning essentially as the actual contract despite its informal title. It can be fully non-binding, serving only as a statement of intentions and a roadmap toward a future agreement that neither party is yet obligated to sign.

Most commonly, however, an LOI is a hybrid — non-binding as to the main deal terms (price, structure, key conditions) while specific clauses are explicitly made binding immediately. This hybrid approach lets the parties lock in protections they need right away — like confidentiality or exclusivity — without committing to a deal whose final terms are still being worked out.

When a dispute arises over whether an LOI created enforceable obligations, the analysis generally centres on the actual wording used and the surrounding circumstances — not the label on the document. A letter titled “non-binding” that nonetheless contains firm commitment language, or omits any “subject to a definitive agreement” qualifier, can still be found binding if that’s what the wording and the parties’ conduct point to.

Conversely, a document that isn’t called a letter of intent at all could still be found binding if its substance shows the parties intended to be bound by it. This cuts both ways: parties who want an informal, exploratory document to stay that way need the wording to clearly say so, while parties who actually want firm commitments locked in shouldn’t rely on the “Letter of Intent” label to achieve that on its own.

Conduct after signing also matters. If the parties behave as though the LOI is the real deal — for example, by starting performance, exchanging deposits, or treating its terms as final in later correspondence — that conduct can be used as evidence of what they actually intended, regardless of what a “subject to” clause says on paper.

The overall structure of the document matters too. A court asked to decide whether an LOI was binding will generally look at the agreement as a whole — how detailed and final the language is, whether essential terms like price are left open or fully fixed, and whether the document reads like a complete deal or like a framework for future negotiation. No single phrase decides the outcome on its own; it’s the overall pattern that tends to matter most.

Even within an otherwise non-binding LOI, certain clauses are routinely carved out and made explicitly binding. Confidentiality is the most common — protecting information exchanged during the negotiation regardless of whether the broader deal ever closes. A separate, more detailed non-disclosure agreement is sometimes used alongside the LOI for this purpose.

Exclusivity and no-shop clauses are also commonly made binding, preventing one or both parties from negotiating with a competing counterparty while the LOI process is underway. These give each side the comfort to invest further time and cost into due diligence without worrying the other side is quietly shopping the deal elsewhere.

Cost allocation — who pays for due diligence, legal fees, or other expenses incurred during the LOI stage — and governing law clauses are two further provisions often made binding immediately, since both sides generally want certainty on these points regardless of whether the underlying deal ultimately closes.

A dispute resolution clause is sometimes added as well, specifying how any disagreement over the binding portions of the LOI — such as an alleged breach of exclusivity — would be resolved, whether through negotiation, mediation, or the courts. Addressing this inside the LOI itself avoids a second layer of disagreement about process on top of the underlying dispute.

The single most effective way to avoid an unintended result is explicit, clause-by-clause labelling. Rather than relying on a single blanket statement at the top of the document, a well-drafted LOI states directly, next to or within each relevant clause, whether that specific provision is binding or non-binding — removing the guesswork a court would otherwise have to engage in.

It’s also worth avoiding language that sounds more definite than intended. Phrases like “the parties agree that” can read as creating an immediate commitment, even inside a document meant to stay largely exploratory — softer language such as “the parties currently intend” better reflects a genuinely non-binding stage of negotiation, where that’s the actual goal.

On the flip side, a party that genuinely wants certain protections locked in — exclusivity or confidentiality, for example — should avoid vague, aspirational wording for those specific clauses and instead use firm, unambiguous commitment language, so there’s no room to argue later that the protection was never actually binding.

Including a clear expiry date for the LOI, and for any binding clauses specifically, is another simple but often-missed step. Without one, it can become unclear how long an exclusivity or no-shop obligation was actually meant to last, particularly if negotiations stretch on far longer than either side originally expected.

An LOI generally works best as a stepping stone, not an endpoint. Once the parties have settled the deal’s key terms, moving promptly to a definitive, fully negotiated agreement — a purchase agreement, lease, service agreement, or partnership agreement, depending on the deal — reduces the risk of lingering ambiguity about which parts of the earlier LOI still matter.

Our service agreement guide and the broader agreements hub cover what a complete, definitive agreement typically needs to address once a deal has moved past the LOI stage.

Where negotiations stall or a dispute arises over what an LOI actually committed either side to, the tools hub and contact page point to further resources for working through next steps.