When an LOI Comes Back to Haunt a Deal
Entire agreement clauses are meant to bring finality. The signed contract is the full deal, and earlier drafts and letters of intent (LOIs) or Memorandums of Understanding (MOUs) are out. A recent Ontario Court of Appeal decision, Project Freeway Inc. v. ABC Technologies Inc., 2025 ONCA 855 (“Project Freeway”), is a reminder that, where the definitive agreement is ambiguous, a court may still look back at an LOI or MOU as part of the “surrounding circumstances”, even in situations where the definitive agreement includes an Entire Agreement Clause.
This can be a surprise to parties who thought the LOI was safely in the rearview mirror.
In Project Freeway, the dispute over whether post-closing financing transactions triggered the SPA’s earn-out acceleration clause. After the deal closed, the purchaser entered into a sale-leaseback of company real estate (about $97.9M) and a receivables factoring arrangement. The vendor argued these were “sales” of a material portion of the business’s assets, requiring immediate payment of the remaining earn-out, while the purchaser argued they were routine financing steps that didn’t materially change the business or the earn-out metrics.
At first instance, Justice Steele of the Ontario Superior Court of Justice held that neither the sale-leaseback nor the factoring arrangement triggered acceleration.[1] The key was the meaning of “material.” The court held that, in this earn-out context, “material” meant material to the earn-out regime, not simply large in dollar value.[2]
In reaching that conclusion, the court considered “all the circumstances, including the LOI terms”[3] as objective evidence of the parties’ intentions at the time of the definitive agreement.
On appeal, the Court of Appeal agreed the phrase “material portion” was ambiguous, as a portion might be “material” because of its size, or because of its impact on the earn-out payments.[4]
The appeal was dismissed.
Project Freeway argued the trial judge should not have relied on the LOI because the SPA’s entire agreement clause expressly superseded prior negotiations including the LOI.
Both courts rejected that position. Justice Steele relied on the principle that an entire agreement clause “alone does not prevent a court from considering admissible evidence of the surrounding circumstances at the time of contract formation”[5] and held “regard may be had to the LOI”[6] as background facts when interpreting the SPA.
The Court of Appeal held this “did not offend”[7] the entire agreement clause because the LOI was used as an interpretive aid to identify what the parties’ agreement in the SPA actually was.
Practically speaking, the entire agreement clause did not stop the court from going back to the LOI once the SPA language left room for debate.
Whatever the doctrinal label, relying on an LOI or MOU to interpret a signed agreement can undermine contractual certainty. Courts presume parties mean what they include (and exclude) in their contracts, and contractual certainty depends on that premise.
Allowing parties to reach back to an LOI or MOU can:
Reduce certainty about “final” terms (even where the LOI or MOU was expressly superseded by the final agreement);
Harm parties’ ability to negotiate and refine terms since LOIs and MOUs are often used to capture certain principles of a deal while key terms remain open for negotiations. For example, in Project Freeway the Plaintiff’s evidence was that at the LOI stage “they had not negotiated the final terms of the Earn-Out”[8] ; and
Ignore real-world deal evolution as there are often significant changes between an LOI or MOU and an executed agreement and importing LOI or MOU concepts after the fact risks tethering parties to preliminary language they intentionally moved away from.
This case reinforces a practical truth: ambiguity is what gives a court a reason to consult context.
To reduce the risk that a court will look back to prior documents:
Define your “triggers.” For example, if “material” is intended to mean “material to the earn-out,” say so (or specify an objective threshold/test);
Eliminate ambiguities and internal inconsistencies, especially conflicting definitions or similar clauses using different wording, because that inconsistency can create the very interpretive opening that invites a court to look backwards; and
Treat LOIs as legal documents, not placeholders. Remember, even “non-binding” LOIs can later be used as evidence of the transaction’s background.
Having counsel involved early, both in drafting the LOI and in negotiating the definitive agreement, helps preserve contractual certainty and avoid unintended interpretive battles later. If you are negotiating an LOI or MOU, drafting a definitive agreement, or involved in a dispute over contractual interpretations, Alberta Counsel can help.
[1] Project Freeway Inc. v ABC Technologies Inc., 2025 ONSC 1048 [“Project Freeway ONSC”], at para 59.
[2] Project Freeway ONSC, at para 46 and 57.
[3] Project Freeway ONSC, at para 57.
[4] Project Freeway Inc. v. ABC Technologies Inc., 2025 ONCA 855 [“Project Freeway ONCA”], at para 9.
[5] Project Freeway ONSC, at para 50, citing Ontario First Nations (2008) Limited Partnership v Ontario Lottery and Gaming Corporation, 2021 ONCA 592, at para 62.
[6] Project Freeway ONSC, at para 51.
[7] Project Freeway ONCA, at para 14.
[8] Project Freeway ONSC, at para 52.