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
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.
Can a letter of intent be legally binding? ›
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.
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.
What is the legal value of a letter of intent? ›
A Letter of Intent Signals a Formal start to Negotiations
Similar to how a starter pistol indicates an athletic race is to start, a letter of Intent (LOI) fundamentally serves as an indicator that two parties are commencing negotiations.
How effective are letters of intent? ›
While the essential terms of a transaction are generally not legally binding at the LOI stage, the identification of, for example, the purchase price, may make a party feel committed to that term. In addition, the execution of a LOI indicates the other party's commitment to completing the deal.
Can you back out after signing 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.
Can you change your mind after signing a letter of intent? ›
You can change your mind after signing an NLI, but there are legal consequences to breaking this contract.
What should you avoid in a letter of intent? ›
Here's a look at four significant pitfalls to avoid when writing a letter of intent in business.
- Not being ready to continue the transaction. ...
- Not thinking through the right timing for success. ...
- Breaching a nonbinding agreement. ...
- Not defining the binding and nonbinding elements.
While a letter of intent is not a legal document and need not be notarized, it is wise to discuss what it should include with a well-informed estate planning attorney before you begin.
Can I break a letter of intent? ›
In conclusion, breaking a letter of intent should be avoided. Not only can it result in significant financial penalties and potential legal action, but it can also lead to reputational damage and missed opportunities.
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 are the disadvantages of a letter of intent? ›
Letters of intent are not a panacea for engaging a contractor on a whole project, however, and they should never be viewed as a replacement for the main contract. Communications referred to by the parties as letters of intent do not always provide clarity as to the parties' rights and obligations for the initial works.
What makes a strong letter of intent? ›
Highlight specific achievements or projects that demonstrate your capabilities and make you a strong fit for the position. Be specific and provide examples with metrics about how your background aligns with the company's needs, values and goals.
What is the greatest risk of using a letter 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 are letters of intent? ›
A letter of intent is not legally binding in the same sense that a contract is. This means that if the deal falls through, then neither party can sue the other for breach of contract.
Is letter of intent final? ›
A letter of intent is a document outlining an agreement between two parties before the agreement is finalized. As the definition suggests, most letters of intent are not intended to bind the parties to a final agreement, but are a precursor to a final agreement.
Can a seller back out of a letter of intent? ›
Given the uncertainty of how a deal will progress, in most cases neither the buyer nor the seller wants to be ultimately bound by the LOI and will state in the LOI that it is non-binding. In that circ*mstance, either party should be able to walk away from the deal without legal liability.
What are the rules for letter of intent? ›
An LOI must include enough concrete details to show a "meeting of the minds" between the parties but make it clear this it is not meant to be a full contract. LOIs are also used for joint ventures, as companies lay out their expectations for themselves and the other parties.
What are the three types of letter of intent and are they legally binding? ›
There are many different styles of drafting letters of intent, which vary from law firm to law firm and from business lawyer to business lawyer. These styles usually fall into one of three categories: binding, non-binding, and hybrids.
Can you walk away from a letter of intent? ›
But what happens if you sign a letter of intent with someone, and then they walk away from the deal? Is that okay? In general, the answer is yes – a letter of intent isn't a binding contract; it's merely an expression of a plan to negotiate a binding contract.
