Letters of Intent

Letters of intent are documents that parties in negotiation use to begin to put down the details and parameters of their proposed relationship without actually fully binding the parties. Letters of intent also come in different varieties such as memoranda of understanding, and in the startup space, term sheets. However, there are some issues to be cognizant of when negotiating and drafting letters of intent and their kin.

First, letters of intent are generally non-binding as to their substantive provisions; in that case, you will want to make clear that the provisions are non-binding, otherwise if the terms are developed enough the letter can be construed as a binding contract. With certain types of letters of intent, such as term sheets, some or all of the substantive provisions may be binding, in which case you will also want to designate which terms are binding between the parties. And in documents like term sheets, provisions can be binding conditional on something else, such as completed due diligence.

In addition to designating binding and non-binding provisions, you should also make sure the language does not lead to ambiguity and avoid terms that imply an obligation but are often used as a term of emphasis (such as “shall”).

Finally, even if provisions are non-binding, they can nonetheless carry great weight in the next stage of negotiation. For example, the letter of intent contains a mutual duty of the parties to negotiate in good faith, seriously deviating from the terms established in a letter of intent could be construed as a breach of that duty. Even if the parties do not have a duty to negotiate in good faith, even provisions that both parties agree are non-binding create a basis or frame for the continued negotiation, and attempting to radically renegotiate, or even going back to square one on the framework can create ill-will or mistrust and scuttle a deal. So even if a letter of intent is non-binding, you should nonetheless respect those terms and not treat them as something easily discarded.