A party that has signedaletter of intent(LOI) may be legally bound to honor it depending on how the letter is drafted. In a business-to-business transaction, a letter of intent normally contains a provision stating that the letter is non-binding. Even if such language is not included, it is possible a court would rule that the letter is only an expression of intent. On the other hand, the parties to a letter of intent should not rely on assumptions:Strong non-binding language is recommended.
Key Takeaways
- A letter of intent (LOI) may be legally binding, depending on how it is worded and, in some cases, whether a court has determined it is legally binding.
- To determine whether the letter is legally binding, courts will consider the written expression of intent in the letter and what actions the parties mentioned in the letter take after the letter has been signed.
- If the two parties have a history of non-binding letters of intent, for example, the court would be more likely to dismiss the letter's validity as a legitimate contract.
How Courts InterpretLetters of Intent
A court relies on two factors when determining if a letter of intent is binding: written expressions of intent present in the letter and demonstrative actions taken by both parties after the letter of intent is signed. If the letter is treated as a contract, it could be ruled binding.
It is also important to understand the relationship between the two parties. If two parties draft and sign an ambiguous letter of intent but have a history of non-binding agreements together, it is likely the court will rule the most recent letter as also being non-binding.
Business etiquette and protocol can be a determining factor. For example, most mergers and acquisitions begin in earnest with a term sheet, which functions as a letter of intent. The term sheet states the intentions, purchase price, and payment terms. However, term sheets are almost always non-binding. Courts will likely take this precedent into consideration.
A letter of intent is a document outlining the intentions of two or more parties to do business together; it is often non-binding unless the language in the document specifies that the companies are legally bound to the terms.
When aLetter of Intent Is Non-Binding
Suppose a letter of intent is non-binding but one company incurs costs or devotes resources only to eventually have the deal fall through. In many cases, there is no recourse for losses incurred. However, it is possible that the breaching party could be found to have failed to negotiate in good faith.
These laws are ambiguous and likely depend on the jurisdiction and the type of letter of intent.
For example, in 2012, the Delaware Supreme Court approved recovery of "benefit of the bargain" damages between two companies in a mergers and acquisitions deal in the case ofSIGA Technologies, Inc., v.PharmAthene, Inc.
Although similar to term sheets used in business, LOIs are structured in letter format, as opposed to the list format of a term sheet.
Other Uses for a Letter of Intent
Beyond the business world, letters of intent are used by individuals seeking government grants and by some people applying to colleges, such as varsity athletes, who want to state their commitment to attend a certain school.
In some cases, a letter of intent can be used by a parent to specify their wishes for the care and wellbeing of minor children should the parent die. In this case, they are not considered legally binding, such as a will, but will sometimes be considered by family courts making determinations about the children's care.
FAQs
In a business-to-business transaction, a letter of intent normally contains a provision stating that the letter is non-binding. Even if such language is not included, it is possible a court would rule that the letter is only an expression of intent.
How enforceable is a letter of intent? ›
Letters of intent are not legally binding, and don't extend full legal protection to contractual parties. However, if not stated clearly, they can become legally binding, might not always be desirable—especially if the agreement is still pending approval by both parties.
How effective are letters of intent? ›
Most people consider LOIs to be non-binding, but certain provisions such as confidentiality agreements , exclusivity in dealing, and other similar matters should be binding. The LOI is the first stage of negotiations, so both parties will be sizing each other up. It is important to give the proper impression.
Can I be sued for a letter of intent? ›
Yes, it is possible to break a letter of intent. Violating an agreement could result in civil or criminal charges depending on the wording and nature of the letter itself. If one party does not adhere to the letter's conditions, the other can sue for breach of contract.
Can you back out if a letter of intent? ›
Enforceability of a letter of intent
It is, in effect, an agreement to agree. Thus, either party can cancel the letter at any time. However, some parts of the letter of intent may be binding on their own.
How serious is a LOI? ›
An LOI is a Formal Legal Document
Although an LOI is not the same as a sales document, it is a formal legal contract. That means it's enforceable in a court of law.
Is an LOI not legally binding? ›
A properly drafted LOI typically provides that none of its provisions are legally binding except a handful of selective provisions such as the confidentiality and no-shop provisions.
What is the legal value of a letter of intent? ›
A letter of intent is a document outlining the intentions of two or more parties to do business together; it is often non-binding unless the language in the document specifies that the companies are legally bound to the terms.
What is the greatest risk of using a letter of intent? ›
A letter of intent can give the impression of a legal commitment, even though it is not a formal contract. This can lead to misunderstandings and legal disputes between parties.
What are the disadvantages of a letter of intent? ›
Disadvantages of the LOI
Potential for a Legally Binding LOI. Because the majority of due diligence is yet to be completed at the LOI stage, the parties should want the essential terms of a transaction as set forth in a LOI to be non-binding.
The letter of intent must have a termination provision. The Sample Letter of Intent form allows either party to unilaterally withdraw at any time with proper notice.
Can letter of intent be revoked? ›
These can be revoked at any time by either party or cancelled upon the fulfillment of the objective for which it was signed. In the case of the letter of intent issued by the government authorities, at any time the order remains in force can be cancelled based on intervening public interest.
Does a letter of intent hold up in court? ›
Courts have repeatedly held that agreements in principle, letters of intent and memoranda of understanding, as well as other less formal written documents, such as terms sheets and emails, can serve as an enforceable agreement.
Is a letter of intent permanent? ›
The letter of intent does not entitle your employee to permanent employment. You can let them know in a letter, to avoid confusion. In it you state that the letter of intent is not a legally binding document.
What are the rules for letter of intent? ›
The LOI must be concise yet engaging. Use your words smartly. Avoid jargon, adjectives, flowery subjective statements that are not supported by facts. Write a logical, persuasive argument emphasizing how this project can help solve a significant problem or void in the knowledge base.
Is a letter of intent for a job legally binding? ›
As mentioned, an LOI is non-binding. This means that, while it expresses your intention to work for the organization, it doesn't legally obligate you to take the job. It serves as a precursor to the formal agreement and allows room for further negotiations.
Can you change your mind after signing a letter of intent? ›
WHAT HAPPENS IF I CHANGE MY MIND ON A NATIONAL LETTER OF INTENT (NLI)? You are bound to the agreement signed with the NLI. If you do not honor your NLI you lose one year of Eligibility and must serve one year's residence at your next NLI institution before receiving a scholarship.
What are the problems with letters of intent? ›
The major pitfall of using a Letter of Intent is that a court may impose liability on a party based on the Letter of Intent when the parties did not originally intend for it to be a binding agreement.
How binding is a letter of intent in real estate? ›
The main purpose of an LOI is to help the owner and buyer reach a mutual understanding on deal terms before moving into a longer, more formalized due diligence period. It is important to note that LOIs are non-binding.
