A letter of intent is a document outlining the intentions of two or more parties to do business together; it is often non-binding unless the language in the document specifies that the companies are legally bound to the terms.
Consequences of Breaking a Letter of Intent
Generally speaking, when one party breaches an agreement, they may face a lawsuit, reputational damage, or financial penalty. This could include paying back any money the non-breaching party received or covering their legal fees associated with pursuing action against them.
A letter of intent is a document outlining an agreement between two parties before the agreement is finalized. As the definition suggests, most letters of intent are not intended to bind the parties to a final agreement, but are a precursor to a final agreement.
Once the LOI is signed, the next steps are to negotiate the purchase agreement and perform due diligence. These are separate processes, but they usually occur in parallel and take about 90 days to complete.
What happens after the letter of intent is signed? The signing of an LOI typically triggers the due-diligence period, during which negotiations occur, the purchase agreement is drafted, and the buyer's requests for company information are satisfied (see our article, “Preparing for Due Diligence in a Business Sale.”
Generally, yes, you can back out of a signed letter of intent. But pay attention to the language used within the letter – the courts could count it as legally binding if the transaction terms are specific and clear.
Letters of intent are not legally binding, and don't extend full legal protection to contractual parties. However, if not stated clearly, they can become legally binding, might not always be desirable—especially if the agreement is still pending approval by both parties.
First, it is important to remember that a letter of intent is not a legally binding document. This means that the parties involved are not legally obligated to complete the transaction, even if they have signed a letter of intent. However, if one party breaches it, the other party may be able to sue for damages.
This lack of detail in a letter of intent creates scope for ambiguity as to both the terms and status of such letters. Such uncertainty can lead to costly disputes such as the recent case reported as CLS Civil Engineering Ltd v WJG Evans and Sons Ltd [2024].
A letter of intent is a document between two businesses that declares a preliminary commitment to doing business. The letter of intent should outline the terms of any future agreement and can be used to record negotiations and discussions.
Letters of intent are not a panacea for engaging a contractor on a whole project, however, and they should never be viewed as a replacement for the main contract. Communications referred to by the parties as letters of intent do not always provide clarity as to the parties' rights and obligations for the initial works.
While a letter of intent is not a legally binding document, it does however serve as motivation for both the buyer and seller in a deal to keep putting effort into the negotiations process.
Since intent is a mental state, it is one of the most difficult things to prove. There is rarely any direct evidence of a defendant's criminal intent, as nearly no one who commits a crime willingly admits it. To prove criminal intent, one must rely on circumstantial evidence.
Typically, a buyer would state its Letter of Intent is open for acceptance for 72 to 96 hours, or in some cases a one-to-two weeks.
LOI is a non-legal binding agreement between buyer and seller that has two provisions of confidentiality and exclusivity. After your LOI is issued, the due diligence and purchase agreement process continues simultaneously, and then your deal is finally closed.
In many instances, the LOI will state that it is not a contract, and the buyer thinks they still can walk away from the transaction. This can be misleading or outright false. Many LOIs are written such that the entire document may not be binding, but significant portions are.
Because an LOI is the first step in the business purchase process, you want to start on the right foot. That means you want to get an attorney involved to help draft the LOI for you. Drafting a Letter of Intent on your own could lead to mistakes down the road.
Not all letters of intent have legal effect, so the parties may not be contractually bound by their terms. The courts have distinguished between letters of intent that create rights and liabilities and those that do not. Some letters of intent are just “expressions of hope”, which are not binding.
Another similar type of document is a term sheet, which is also a non-binding document that lays out the basic terms of a negotiation or agreement. A term sheet can sometimes be called either a letter of intent or a document of understanding, depending on how the parties are using it.
While the essential terms of a transaction are generally not legally binding at the LOI stage, the identification of, for example, the purchase price, may make a party feel committed to that term. In addition, the execution of a LOI indicates the other party's commitment to completing the deal.
A letter of intent (also known as an LOI) is often written to initiate a business transaction and help define expectations with customers, partners, and vendors before creating a binding agreement.
You can change your mind after signing an NLI, but there are legal consequences to breaking this contract.
Although a document must be signed by each party to be considered legally binding, the mere presence of signatures does not guarantee that an agreement is enforceable in court. To be considered a legally binding contract or document, three critical elements must also be present: Subject, Consideration, and Capacity.