Before parties strike a contract in a business transaction, there is often a certain amount of negotiation that has already taken place. Contracts are understood to memorialize the agreements the parties made during the negotiation process. Business negotiations aren’t always clean cut, though, and sometimes disputes can arise over obligations the parties may have gotten themselves into before even executing an official contract.
One example where this can come up is when parties use a letter of intent during the negotiation process. A letter of intent is basically a document which tries to lay out the course of negotiation between the parties in order that there are no surprises going forward. Although letters of intent are not usually intended to be contracts, they may still contain binding agreements that can essentially be treated as contracts.
One thing parties have to be careful about when drafting a letter of intent is that they don’t get in over their heads, making promises to negotiate a deal before they are ready to do so. Parties who want to secure some reliance from the other party, though, can certainly use a letter of intent to their benefit by including binding provisions.
Disputes over the enforceability of a letter of intent are a bit like contract disputes in that courts have to look at the language used and determine the intent of the parties at the time the letter was executed. With letters of intent, then, there is no simple answer to the question of enforceability. A variety of outcomes are possible, depending on the circumstances of the case and the law of the state where the dispute is being hashed out.
Drafting a letter of intent is not always a “DIY” project if the value of the transaction is significant. It is important for parties to a letter of intent to work with an experienced attorney in handling the dispute, particularly when significant damages are involved. Doing so will ensure that each parties rights and interests receive the advocacy they deserve.
Source: American Bar Association, “A Letter of Intent is Enforceable. A Letter of Intent is not Enforceable.,” Ira Meislik, Accessed Jan. 16, 2015.