Letter of Intent
A letter of intent is a writing in which the parties to a proposed transaction state mutual interest in or commitment to one or more important terms of an agreement and, in most cases, show mutual intention to prepare a more definite contract to embody the complete agreement.
The distinguishing characteristic of a letter of intent is that it does not and is not intended to contain all the terms and conditions contemplated by the parties to be part of a final complete contract for the deal. Rather, it is intended to contain only the important business and financial terms.
Although the parties may not intend the business terms contained in a letter of intent to be binding, by using a written letter of intent the parties may implicitly agree to negotiate in good faith. By failing to negotiate in good faith a party may be subject to reliance damages suffered by the other party. The parties may specifically provide in the letter of intent that there is no obligation to negotiate in good faith, but such a provision may have a chilling effect on the continuing negotiations.
Letters of intent can serve the useful purpose of identifying and memorializing the parties understanding on key points so that further negotiations on contract documents are limited to details. Letters of intent also permit participants to address controversial issues during the initial stages of a transaction when both sides are motivated to reach an agreement.
Letters of intent can streamline the negotiation process however then can be burdensome and inefficient if the transaction is relatively straightforward and agreed upon. Because there is no standard practice, the decision of whether to use a letter of intent in a particular transaction is a matter of professional judgment.
Factors one should consider when deciding on whether to use a Letter of Intent:
1) Whether the transaction is complex;
2) Whether one anticipates that the principal terms of the transaction will be aggressively negotiated by the other side; or
3) Whether it would be helpful to address certain issues before spending the money to have counsel draft a definite statement