When entering a business or investment agreement, one of the first documents often drafted is a Letter of Intent (LOI). An LOI sets out both party’s intentions. The intention is usually to record negotiations and discussions, clarify the terms of a planned transaction and build trust between the parties involved. An LOI is typically a precursor to more formal contractual paperwork – a milestone worth marking before more detailed discussions and onerous negotiations.
Many people involved in business find themselves asking, “Do I need a lawyer for a Letter of Intent?” The answer, unsurprisingly, perhaps, varies from case to case. LOIs are not always legally binding, but they share the terms and expectations of any deal. As such, getting the details right and avoiding errors can prevent conflict, legal disputes, and financial losses down the line. This blog won’t, however, necessarily provide a definitive answer, and we recommend you gain legal help to answer based on your circumstances.
What is a Letter of Intent vs A Contract?
A Letter of Intent (LOI) is a document that outlines the preliminary terms of a business transaction before a formal contract is signed. It expresses commitment between parties, establishing key deal points and the intended course of negotiation. An LOI is often used in mergers, acquisitions, joint ventures, and investment agreements. Signing one sets out an agreed framework for both parties to follow through negotiations en route to a finalised formal contract.
A commonly held view is that an LOI is merely a formality. Still, while an LOI does not typically create a legally binding obligation, some provisions can unwittingly lead you to items that are enforceable by law. A poorly drafted LOI can lead to disputes, financial liabilities, and lost opportunities.
When is a Letter of Intent Legally Binding?
Despite not being generally considered legally binding, specific clauses within an LOI can create legal obligations between parties, even if they are included inadvertently. If not worded correctly, clauses may be problematic. We have included some examples here.
Exclusivity Clauses: If your LOI states that parties agree not to negotiate with other parties for a set period, this could be enforceable in court.
Confidentiality Agreements: Any obligation to keep sensitive business information private is legally binding.
Good Faith Negotiation Obligations: Some LOIs include clauses requiring parties to negotiate in good faith, which could result in legal action if one party acts unfairly.
Dispute Resolution & Governing Law: If an LOI specifies how disputes should be resolved and which legal jurisdiction’s laws apply. Such clauses may be enforceable even if the rest of the LOI is not.
Without careful drafting, an LOI could inadvertently create legal obligations beyond those which either party intended. This is why many business owners and investors seek legal advice before drafting or signing one. A legal review of a Letter of Intent needn’t be overly costly but could save you significant time and money in the long run.
Do You Need a Lawyer to Draft a Letter of Intent?
Who drafts a Letter of Intent will depend, to a large degree, on its purpose. If the agreement is informal and involves minimal risk, it is perfectly possible for an organisation to draft it without specialist legal assistance. However, in the following circumstances, seeking legal support is always advisable:
Significant Financial Commitments: If large sums of money are involved, asking experts to correctly frame the terms of a Letter of Intent is always advisable.
Mergers, Acquisitions, & Partnerships: Changing business ownership, structures, and operations can require precise wording to avoid unintended legal implications.
Intellectual Property or Trade Secrets: If the Letter of Intent refers to confidential information, asking for external legal expertise can help safeguard the intellectual property rights of all involved.
International Transactions: If cross-border laws apply, a lawyer can ensure compliance of the Letter of Intent across different jurisdictions.
Attempting to draft a Letter of Intent without legal expertise can result in unclear obligations, enforceable liabilities, or conflicts over key terms. While the initial cost of legal assistance may initially seem unnecessary, the long-term benefits often outweigh the risks of a poorly drafted document.
Key LOI Clauses a Lawyer Can Help With
A well-structured Letter of Intent should include specific clauses that clearly define the intentions of both parties and minimise potential legal risks. Seeking Letter of Intent legal advice involves consulting a lawyer who can assist in drafting and reviewing the document to avoid errors, misunderstandings and disadvantages. We’ve outlined key clauses that benefit from this support in the following;
Legal professionals frequently help clients with confidentiality and non-disclosure clauses, ensuring that any information exchanged during negotiations remains protected. Legal advice on termination and expiry terms may prove useful, too. Including an adequately worded dispute resolution and governing law clause is another critical area where legal expertise is beneficial.
Whatever the specific clause, legal professionals can work on your behalf to distinguish between binding and non-binding provisions within any Letter Of Intent. Often, business owners are unaware of provisions that can be interpreted as legally enforceable obligations.
By seeking legal input, businesses can ensure that all provisions are fair and do not unduly limit future opportunities for any party. Outlining the framework of an agreement while avoiding unintended legal pitfalls is the great strength of a Letter of Intent. A correctly drafted LOI can lead both parties to negotiate confidently, knowing their interests are fully protected.
Alternatives to a Letter of Intent
In some situations, an LOI may not be the best option. Other contractual documents may be more appropriate depending on the nature of the business transaction. For example, if both parties are ready to commit to binding terms, immediately drafting a complete contract may be a preferable and more efficient route to agreement. A Letter Of Engagement rather than a Letter of intent may be more suited if one organisation or individual is using the services of another. Such letters are often seen in consultancy or advisory services businesses. You can read about the differences between the two documents in our blog, Letter of Intent vs Letter of Engagement. Finally, a Memorandum of Understanding is generally considered to achieve similar outcomes to a Letter Of Intent on a less formal basis. They are appropriate when parties want to document and express a wish to work together without formalising contractual terms.
It’s hard to discuss Letters of Intent with overly strict guidance. Sometimes, informality and broad statements will be suited to the business at hand. However, at other times, a finer, more detailed approach is required. In all cases, some form of legal advice is advisable.
Conclusion
In many business scenarios, a Letter of Intent can set a strong foundation for future agreements. While not always legally binding, they do carry weight. Legal oversight in drafting or signing an LOI is strongly recommended. By getting advice, businesses can avoid costly misunderstandings, legal disputes, and unintended commitments.
If you require legal assistance drafting or reviewing a Letter of Intent, Jamieson Law provides expert legal guidance to protect your business interests. Our team specialises in business transactions, contract drafting, and legal due diligence, helping you navigate complex agreements with confidence. You can read more of our legal blogs or contact the team to discuss your legal needs.
Frequently Asked Questions
A Letter of Intent can be drafted by either party involved in a business transaction to set the terms for a potential future period of negotiation and agreement. A business owner, investor, or executive may draft the document in simple cases. However, in more complex cases with higher perceived risk, a lawyer is often involved to ensure success.
A Letter of Intent is not automatically legally binding under UK law. However, specific clauses within an LOI, such as confidentiality, exclusivity, and termination, can create enforceable obligations. The way an LOI is drafted determines how much legal weight it carries.
If an LOI is non-binding, either party can leave negotiations without legal consequences. However, if binding provisions (such as exclusivity or confidentiality clauses) exist, the withdrawing party may still have to comply with specific provisions. A lawyer can clarify the risks before signing.
Templates may be helpful in straightforward cases, but a bespoke LOI document is more likely to align with the specific needs of the business agreement.
