/wall_street_179681980-5bfc2b9746e0fb0083c07d29.jpg)
A party that has signed a letter 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 Interpret Letters 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 a Letter 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 of SIGA 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.