The title of a document doesn’t matter: an agreement is an agreement. It isn’t uncommon for a “Letter of Intent” to have binding provisions. Some of these, like confidentiality or a duty to act in good faith, are normal and within the spirit of a Letter of Intent. But you will see binding clauses transferring ownership of an idea or setting out a binding payment plan – these are not normal but if you aren’t careful, people will sneak them into an LOI and try to make them enforceable.
Ok, as a lawyer, I rarely see the need for a LOI. Generally, the purpose of an agreement is to create a binding relationship between two parties. It spells our the rights and obligations of each party which are governed by the law of contracts and can been enforced by a court. The entire purpose of a Letter of Intent is to set out the intentions of the parties without creating any enforceable rights. And intentions change every day. You can see why lawyers aren’t big fans of these kinds of letters, there isn’t much we can do with them.
So, the big question is, why should I care? If the LOI is just a list of intentions, if it isn’t binding, if you can’t get it enforced in court, why is there any problem? It’s a problem because people will put enforceable terms and conditions in an LOI and hope that you will just sign it. The title “Letter of Intent” on the paper really means nothing to a court deciding whether or not there is an agreement. The court will enforce those parts of the LOI that look like they were intended to be binding. So, don’t let your guard down when someone puts an LOI in front of you and asks you to sign, saying there’s no commitment. Look for the commitment, in most cases there will be something to find.
So, if there’s no legal reason to have a Letter of Intent but there may be downside, then why bother? There is still moral value to getting something on paper. There is considerable value if it is used as a sales or purchasing technique. Just remember, don’t let your guard down and read past the heading on the page, make sure you are expressing your intentions and not committing before you are ready.
The Issues & A Few Ideas
Normal Enforceable Terms
- Confidentiality: If you haven’t already signed a Non Disclosure Agreement but you want to keep your discussion private, putting confidentiality provisions into an NDA can be useful and is quite common. Make sure that both sides have the same responsibilities, confidentiality goes both ways.
- Limitation of Liability: The purpose of a letter of intent is to express your position on paper without creating a legal obligation. Limiting liability furthers this intent by making sure that no matter what happens, you are only on the hook for certain, measureable damages.
- Not a License: Some provision stating that the LOI is not a license or transfer of ownership and that both parties own and control what they brought into the relationship is consistent with a statement of intention.
Sample Terms That Are Not Normal
- Transfer of Ownership: One party drafting an LOI and claiming to own everything that both parties work on together.
- Exclusivity: A clause stating that one party is obliged to deal exclusively with the other party, not that they intend to sign an exclusive deal but that they are already in an exclusive relationship.
- Any clause that starts: “The parties agree” or “The parties will”. This language indicates an obligation, not just intent. You should be looking for language like “The parties intend” or “Subject to the execution of a definitive agreement, the parties will”.