Seven Issues to Consider When Preparing Your Next Letter of Intent

April 6, 2024

            A letter of intent (“LOI”) is a great device to sort out fundamental business points in a deal before incurring the costs of documenting the transaction; however, LOI can also be a disaster in the making if not drafted properly. Seven key issues to consider when drafting your next LOI are:

1. Purpose Controls The Form

The failure to draft carefully may result in viable claims for breach of contract, fraud, bad faith, unfair dealing, detrimental reliance and others. The purpose of the document will therefore control the scope, language and care in preparation. Will it follow the usual format of non-binding bullet points, or will the parties be bound by detailed points (i.e. confidentiality, exclusive dealing, no marketing)?

2. Limit The Number of Issues Addressed

You cannot resolve all the issues of a multi-page contract or lease in a two or three page letter of intent. Keep the parties focused at the outset on the big issues.

3. Keep it Simple

Going back to the “purpose” of the document, you need to decide how much you want to accomplish with the letter of intent. If it is just a psychological jumping point, short and sweet is the approach to take. If your goal is to create refined consensus on certain key points, then thoughtful drafting in lawyerly detail will be required to cover the issue. The detailed provisions will likely resemble actual contract language instead of simple bullets because precision is what you are seeking on those issues. If you are trying to create some type of obligation with the LOI, then very careful drafting is required so that the obligation is limited and does not, by implication, move the parties to a broader scope of contractual obligation.

4. Be Aware of the Legal Traps

Simple, friendly LOI usually get a not so friendly look when the subsequent contract negotiations fall apart and the disgruntled suitor looks at his or her bills from professionals. There have been a great number of such cases and plaintiffs have been known to file suit based upon theories such as fraud, the existence of a written or oral agreement, specific performance of the written or oral agreement, damages for breach of the agreement, promissory estoppel and the unfair trade practices. Plaintiffs will often attempt to piece together the LOI with subsequent letters or emails in an effort to “create a binding contract.” Various courts, in ruling on such claims, have looked at factors such as: (1) the language of the agreement (some LOI actually say “we agree” or “we will sell to you if…”; (2) the context of the negotiations; (3) the existence of open terms; (4) partial performance; and (5) custom of such transactions. The available legal theories and court considerations are many and potential exposure is great. Your LOI itself or when pieced together with subsequent communications can result in substantial damages and exposure. Understanding this is the first step to staying out of trouble.

5. Consider Using Protective Language

Include non-binding language to protect yourself such as:

“This is neither an offer nor an acceptance of an offer, and no agreement of any kind is created hereby. Neither party shall have any obligation to proceed to the completion of an agreement. Until such time as a mutually acceptable [insert document type here] has been executed and delivered by each of the parties, neither party may take any action based upon any assumption that an agreement or obligation exists, and each party shall have the right to terminate discussions at any time, with or without cause. Upon such termination, neither party shall have any further obligation to the other. Nothing herein shall preclude either party from continuing discussions with any other party pending completion of these negotiations. It is understood that prior, current and future communications in connection with our negotiations shall not create any obligation or agreement of any kind. All costs incurred by either party in connection with these negotiations shall be the responsibility of the party incurring such costs. This term sheet is presented to you and all further communications and negotiations shall occur upon the condition that the preceding statements are agreeable to you.”

6. Be Consistent

LOIs and subsequent correspondence should retain the non-binding caveats and other protective language contemplated above, and the use of “agree”, “we will”, “offer”, “accept” and words with similar effect should be avoided throughout the LOI process. If it appears as boilerplate, the recipient may not mind. Make sure communications by your agents utilize similarly protective language as they can often bind their principal.

7. Consider Use of Boiler Plate Language

For those who use LOI with regularity, the development of base forms with strong non-binding language (or specific components which are binding such as confidentiality and exclusive negotiation periods) can be developed in a manner capable of simple manipulation for each specific deal. Such a program will minimize exposure while allowing the business team to have some flexibility to craft business term language that meets the unique needs of each deal.

This article is for general interest and education only and does not constitute legal advice. The reader is encouraged to seek legal counsel before utilizing any suggestions contained in this article.