Is a Letter of Intent Legally Binding?
Let’s say that you are in discussions with someone else to enter into a contractual agreement. There is no contract yet—in fact, many key terms haven’t even been discussed—but both parties definitely have a clear intention to enter into a contractual relationship at some point.
You then are presented with what looks like a letter of intent (LOI). It looks like a contract…but it also doesn’t—in fact, it specifically says it isn’t a contract. What’s going on here?
The Letter of Intent
A LOI is essentially an “agreement to agree” on something later on. An LOI is an expression by both parties that they will try to enter into a contract at a later date. This seems counterintuitive, but a LOI can be vital to lay a groundwork for parties that need to go through certain hurdles, before a contract is entered into.
As an example, many contracts require extensive due diligence or disclosures or record reviews, before the parties can knowingly and meaningfully enter into the agreement, or before they know what to enter into. This “pre-contract” process needs to have rules and a framework. The LOI provides that framework. It may say what will be produced by each party, or say how long a party will have to do the research needed to ascertain whether to actually enter into the agreement or not.
Can You Sue?
On its own, a LOI is not a contract, and you can’t sue for breach, although the LOI can contain terms that may give rise to legal liability if breached. Or, the remedy for the LOI may be a forfeiture of a deposit made by a party.
For example a contract may say that while the parties to the LOI are considering whether to enter into the agreement, that they will not do business with, or enter into a contract with, somebody else. If that is breached, there could be damages, even though the LOI itself is not a binding contract.
Whether you can sue for a provision contained in a LOI, largely depends on specificity. The more specific a LOI is, and the more definitive it is in the rights, duties and obligations of a party the more likely it is that someone can sue for a breach of the NOI.
Parties seeking to avoid liability, should keep their letter broad, vague, or make sure there is specific language that says that nothing in the LOI can form a legally binding contract.
A LOI can agree that parties will agree and execute another, more comprehensive agreement later on. If the parties don’t execute that later agreement, the LOI may allow an aggrieved party to sue. In this situation, the later agreement should say what the LOI said that the later agreement was going to say.
Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993 today for help with your business contracts.