What is a Letter of Intent (LOI) and When Should I Use One?

When two parties commence negotiations, sometimes a Letter of Intent (LOI) is used to ‘flesh out’ some early details. However, a Letter of Intent is not necessarily legally binding in and of itself. What is the point then, you might ask? Below we will discuss 5 common things included in a Letter of Intent (LOI) and why it can in fact, be a very useful document to have when you commence your negotiations.

A Letter of Intent (LOI) (also called a Memorandum of Understanding) is simply a document signed between two parties when they wish to commence formal negotiations. The terms of such a letter or Memorandum can differ, but its overarching purpose is to set things in motion, with a signed agreement being the finish line.

Table of Contents

A Letter of Intent Signals a Formal start to Negotiations

Similar to how a starter pistol indicates an athletic race is to start, a letter of Intent (LOI) fundamentally serves as an indicator that two parties are commencing negotiations. This can be taken to be a written affirmation of many key elements of negotiating, such as good faith. Further, whilst you may not have the final terms of your contract set out, it is wise to have a document which symbolises that this is soon to be the case.

Confidentiality

Letters of Intent are not in their entirety not legally binding. They often contain clauses which require that parties to the negotiation do not disclose information they have learned about the other side in their negotiations. Subsequently, you or your company’s confidential information is protected. In the event that the negotiations don’t come to fruition, you at least have the other side’s word that the details of these negotiations won’t be disclosed. If you want confidentiality to be a term of your negotiations, you can do this by inserting such a clause into your Letter of Intent or having the other side sign a non-disclosure agreement.

It Can Provide a Structure to Your Negotiations

Negotiations can be difficult where there is no plan of what you want to achieve, or no timeline by which to achieve it. A Letter of Intent or Memorandum of Understanding can set out these rules, so negotiations don’t stall, or so that the parties don’t get sidetracked by issues which are not relevant to the agreement that is intended to be made by the parties. If negotiations are not completed by a certain time (say, 6 months after they started) then you can refer to this document to ‘push’ them along, or to even walk away if no progress is being made.

It Can Contain or Clarify Details of a Party’s Objective

Perhaps both parties already have a specific idea of what the contract will be, and it’s just the nuts and bolts which need to be negotiated. In this case, a Letter of Intent or Memorandum serves as the statement which will keep things in place until a contract is signed. A common example of this is in Mergers and Acquisitions. In this case, a company knows it is going to acquire another entity – it may just be the timeline and price that need to be finalised. Further a Letter of Intent can be used personally – if you want to make any wishes known in the event something happens to you. Though not as concrete as a will, a Letter of Intent will still be taken into consideration.

Letters of Intent or Memorandums of Understanding, though sometimes broad in scope, and not always legally binding, provide many benefits in both a personal and commercial context.

Putting your wishes and intentions for the future down in writing provides not only a written record of your intentions, but also provides protections where formal legal documents are yet to be signed.

Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

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