Letter of Intent (Loi) in Crude Oil Deals - The Legal Traps and Pitfalls of Loi for Crude Buyers

Law Of Diminishing Marginal Product - Letter of Intent (Loi) in Crude Oil Deals - The Legal Traps and Pitfalls of Loi for Crude Buyers

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Nowadays, to hear many of the oil sellers and operators, particularly their brokers and agents, who are involved in the international open market crude selling, recap it, this document - called the "Letter of Intent" or Loi, for short - is not only an needful document for doing crude oil business, but one which every credible someone or firm engaged in crude buying should all the time use in initiating a purchase. To many of these operators, not only should crude oil buyers use the Loi to activate their buying orders, but initiating the buy order in that manner, they say, has all the time been the usual way by which credible buyers activate their purchasing projects, as doing it that way indicates, they claim, that a buyer is "serious" and unmistakably committed to development a purchase.

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The Sellers' Rationale For Demanding The Loi

This position expressed by one representative of a seller, a Swedish-based broker, in a modern replacement with this writer's office concerning the seller's offer wherein the prospective buyer's mandate resisted the broker's insistence that the prospective buyer must first sign an Loi, pretty much sums up the original rationale offered by sellers and/or their agents for having an Loi:

"Buyer who is serious, ready and able to buy [crude oil], will sign [an] Loi and all the needful documents that protect the ownership of the Brokers and proceed. There is nothing to lose in signing those documents. This is how it is usually done and this is how it should be."

In sum, the rationale basic the Seller's ask for Loi, can essentially be summed up as follows:

1) That giving an Loi to a seeder by a prospective buyer, is an indication that the buyer is "serious" and willing to purchase;
2) That use of the Loi is the usual way of initiating a purchasing proposal by a buyer, and is the right and allowable way to go; and
3) That there is nothing for anything in the deal to lose by a prospective buyer signing an Loi.

How Valid, Or Otherwise, Are These Usual Rationale By Sellers Or Their Agents?

Ironically, while oil sellers and their agents often ask that prospective "serious" buyers involved in crude oil transactions should first offer an Loi, the buyers, on the other hand, are not commonly enamored of that idea. Especially when, in effect, what is being asked of them is to provide the Loi upfront to a little-known Internet-generated seeder about whom they lack any familiarity with or whose bona fides as sellers they know next to nothing about - other than, perhaps, that they (the buyers) had had some introductory communication with the "seller" via an Internet contact. In deed, to this writer's knowledge, crude buyers, particularly the more established and leading ones, would very rarely offer an Loi upfront to any sellers to activate a purchase. And when, especially, the supposed "seller" that's involved is one that is a virtual unknown to the buyer, or one that is merely an Internet-generated seeder about whose bona fides and credentials the buyer knows approximately next to nothing, one can be approximately unmistakably clear that the chances of a crude buyer of substance signing over an Loi to such a seller, is approximately next to zero.

Contrary to the sellers' and their super sales-conscious agents' well-known claim that "There is nothing to lose in signing those documents," quite the perfect opposite is true - namely, a great deal, in fact, could potentially be lost particularly by the buyer by signing an Loi to a supposed seller. Why? In a word, this is because the Loi is unmistakably fraught with many incalculable legal flaws, traps and pitfalls, much of which could often be prohibitively precious for the buyer, agreeing to legal authorities and contract law experts. (See below for more on this)

In fact, some experts have called the Loi a document whose use is primarily advocated or promoted only by amateurs and marginal dealers or "joker-broker" types in the crude trade business, especially the overzealous sellers' agents and brokers in a desperate hurry to land some buyers. Mr. Ziad K. Abdelnour, President & Ceo of Blackhawk Partners, Inc, a New York-based advisory firm to traders and suppliers of metals, minerals and crude oil commodities, calls the Loi document something that is primarily "used out on the Internet by fresh traders," and by "inexperienced 'intermediary seller' who is claiming to be the supplier."

The point is that the often-heard understanding and claims by some sellers or their overzealous agents and brokers that the use of the Loi to activate a purchasing proposal by a buyer "is how it is usually done and this is how it should be," may be applicable and frugal only in the minds, the imagination, and hopes or dreams of those sellers, especially the more marginal ones and their brokers and agents who control on the fringes largely on the Internet. It is Not a view that is shared by the broad spectrum of credible buyers, more especially when the "sellers" involved are largely unknown and obscure operators.

The Reasons Why Buyers & Experts Shun & Disapprove Of The Use Of Loi

They comprise the following:

1. Loi is used as manipulation tool at the hands of unscrupulous sellers & agents.

Often times, obscure or scam-oriented persons who claim to be crude Sellers, or recount themselves as sellers' agents, mandates or brokers largely by an Internet palpate or communication, employ the Loi merely as a tool to speedily "corner and box in" a prospective buyer to a buy deal, before the prospective buyer may ask that they provide their firm profile or show him something tangible to demonstrate that they are truly legitimate sellers. Such sellers would persistently ask that the prospective buyers hurry and issue them an Loi right upfront purportedly as proof that they are "serious" about development the buy - that is, before the buyer may probably start raising some probing questions about them or their credentials as legitimate sellers.

Many a time, especially in a case inviting a supposed seeder who is either a fake seeder or does not unmistakably have the supposed crude in hand yet, or, an unscrupulous aspiring seller's agent or broker who unmistakably has not acquired a crude supplier (seller) yet, buyers may issue an Loi only to find out that there is no seeder on the other end. This happens a lot in situations where you have an hungry agent or facilitator who is still struggling to get a real supplier, and by extracting this Loi from an unsuspecting buyer, this facilitator can commit the buyer only for him then to start hustling to find a seeder or supplier.

2. Loi is a Legally Worthless Document That Means Virtually Nothing

As a practical matter, in legal terms, the Letter of Intent is a worthless and meaningless document. The Loi is a badly flawed legal document. This is because the document is, as one experienced contract law expert put it, "an business agreement to agree which is non-binding and non-enforceable as a contract."

Ziad K. Abdelnour, President & Ceo Blackhawk Partners, Inc, the New York-based advisory firm on such matters, puts it this way: "Giving a Letter of Intent only means 'Yes I'm intent to buy the goods but I can turn my mind anytime.' A letter of Intent is not a binding contract. [Hence] The Letter of Intent is a total waste of time on a worthless piece of paper."

So, if a letter or document that nominally or presumably conveys the signer's "intent" or intention to buy, is essentially meaningless and worthless in legal terms, and is not binding on the signer or anyone, and Cannot be enforced on him, then why would a respectable crude buyer, in the first place, want to waste its precious time and resources (or that of its costly lawyers) to engage in such a fruitless rehearsal for the advantage of a seller? Especially for an unknown or obscure seller?

3. Loi is fraught with many legal booby traps & pitfalls especially for the buyer.

But probably the most damning presuppose why credible crude buyers would have petite or no use for Loi in their buying dealings, is that using the Loi is fraught with many incalculable legal traps and pitfalls much of which could atimes be very precious for, and to the detriment of, the buyer, agreeing to legal authorities and contract law experts.

A basic flaw of the Loi, lies in what Vasilios J. Kalogredis, a Wayne, Pennsylvania attorney, calls "the uncertainty and inherent risk of any such undertaking." Kalogredisis, a firm contract law expert, explains it this way:

"Letters of intent are often touted as a 'non-legally binding' way to get the parties to set forth in writing what the undertaking is among them relative to a transaction. Too often, parties will sign such a document, feeling that they have petite or nothing to lose by doing so... [True, that's] one of the inviting elements of the letter of intent [its purported non-binding nature]. However, courts have found letters of intent to originate binding obligations, even if the letter itself does not explicitly state that it is binding... clear provisions within the document may unmistakably [still] have legal effect."

Kalogredis calls that basic fact that a document commonly viewed by many as a casual and non-binding document, could atimes still come to be binding under clear unpredictable circumstances, "one of the traps in a letter of intent," and adds:

"My advice [to parties contemplating having an Loi] is to head somewhere with caution before signing any such document. As a normal rule (and there are exceptions), I urge the parties to go right to the final documents and "dot all of the I's and cross all of the T's," rather than go through this interim step of a letter of intent, which has many inherent traps."

Another contract law attorney, Ivan Hoffman of California, makes essentially the same point:

"Parties to a transaction sometimes intentionally originate a letter of intent as an expression of what they intend to agree upon should clear circumstances arise... [whatever happens], the document will not be binding and thus not enforceable until those circumstances arise. Thus, the letter of intent is essentially a legally worthless document. It is not clear to me the presuppose any party would ever bother to originate such a document and yet I have seen it used on many occasions. If parties to a transaction intend to bind each other, then they should originate a binding contract, not a letter of intent. If the parties to a transaction do not intend to bind each other, then why bother creating a document that is not binding?

However, sometimes one of the parties prepares a document believing it to be a valid and enforceable business agreement only to find, after costly litigation, that it was not a binding business agreement at all but merely a non-binding, non-enforceable business agreement to agree, letter of intent."

4. Loi as a Source or Promoter of Undue Litigation

Aside from the legal qoute of the ambiguity and uncertainty inherent in Loi, there is yet other major qoute inherent in the document, from a legal standpoint. Namely, unmistakably because the Loi is basically ambiguous and non-definitive by nature, the document often unmistakably lends itself to distinct interpretations and understandings at the hands of distinct parties (or even the courts), and thus lends itself, in turn, to being a fertile source for undue litigation and legal contests for those involved with the use of that document in their transactions.

Lawyers at the Coollawyer.com, by comparison the legal "paradox" inherent in the Loi, wherein the signing of an Loi, is often prone, not to bringing about less litigation, but more litigation, and put it this way:

"Letters of Intent, legally, are the worst of all worlds. Writing a letter of intent is not to be taken lightly. In law, you either have a contract or you don't. Loi's are the legal equivalent of "almost pregnant." Letters of Intent emphatically state that. They state that they are not formal agreements, and then often head somewhere to set forth agreed terms of the proposed transaction. Given this paradox, if the deal goes sour, one party can argue [in court] that those agreed-upon points were, in fact, agreed upon - or, in fact, a binding contract. And, in some cases, furthermore, that the party relied on the Loi and has monetary damages based on such reliance."

The lawyers add that: "This is the legal qoute with a Letter of Intent - you can't legally state you agree to something and then state that you don't in the same document."

Famous Case of a Letter of Intent Gone Bad: Court Case of Getty Oil vs. Pennzoil

A famous example often cited by legal scholars, was a case inviting the Getty Oil and Pennzoil in very early 1984. The parties had signed a "Memorandum of Agreement" - viewed by the parties at the time as a Letter of Intent - for a involved venture and stock transaction, whereby Pennzoil would buy Getty Oil stock, and set forth normal terms of the venture that had been reached in conversations, and also stipulated that the Memorandum was field to the approval of the Board of Getty Oil. The Board of Getty Oil sooner approved the transaction and both parties announced on January 4, 1984 in a press release, an "agreement in principle" to the terms of the Memorandum. The final agreements for the merging of Texaco and Getty Oil were signed by the parties on January 6 - 8.

However, during the same period, on January 6, other oil company, Texaco, came into the photograph as it publicly announced that Texaco and Getty Oil would merge. Pennzoil protested the proposed merger, and Getty Oil filed a law suit for the court to issue a declaratory judgment that it was not bound by any contract it had with Pennzoil.

The long and short of the story, is that the court, after scrutinizing not only the Memorandum, but also the wordings of the press releases and other documents that Getty Oil and Pennzoil had issued over the procedure of their dealings, found Getty Oil to be "in breach" of the Memorandum of business agreement - the document the parties had viewed as a letter of intent. Thus, a document (the letter of intent) that the parties had started out viewing as non-binding and unenforceable, had changed from being that, to being a final agreement! Pennzoil, on the other hand, ended up with .6 billion (later located for billion) from Texaco for interfering in its deal with Getty Oil.

Moral of the story? If you're ever contemplating using a Letter of Intent in a firm transaction, you had great watched out, it may not be as simple a matter as you might think. You great be very cautious, for it could supervene in unforeseen and unpredictable consequences!

Summary

Put very simply, as a legal or even firm document, it's hard to image any document that could be as beset with so many near-crippling legal flaws, traps and pitfalls for its signer, as the Loi. Consequently, it comes as no surprise that in the Real world of international buying and selling of crude oil, while the crude sellers and their army of sales-obsessed aggressive brokers and agents may commonly be infatuated with the idea of having the Loi document widely and routinely used by prospective crude buyers to activate their purchasing offers, nothing, on the other hand, could be more disliked, more unacceptable or unwanted by most crude buyers, particularly the more credible and substantive lot. What is more, on top of all else of decisively negative nature about this document, the Loi is a document adjudged by virtually every legal expert in the field as a document that is legally meaningless, worthless, unenforceable and non-binding both on the signatory parties or on anyone, but yet has the inherent to bring forth massive and unanticipated legal complications and problems for the signer(s).

To conclude, there's possibly no more apt way to desist this piece, than to quote this very fitting statement by contract law attorney, Ivan Hoffman, of California: "[Given that] the letter of intent is essentially a legally worthless document [but yet one that could potentially cause many serious legal problems for the signer]. It is not clear to me the presuppose any party would ever bother to originate such a document and yet I have seen it used on many occasions."

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