What Is a Letter of Intent?

A letter of intent is typically a short form letter, laying out that two parties are thinking about doing a deal together. Here's the information it usually includes.

Someone has proposed to our company that we do a letter of intent for a potential deal. What is it, and what should I be worried about?

A letter of intent is typically a short form letter, laying out that two parties are thinking about doing a deal together, and setting forth some of the key terms of the proposed deal. It is a prelude to a full-blown agreement, to get "big picture" consensus on a proposed relationship. The key issues in letters of intent become:

1. Is the letter of intent binding or non-binding? Are some portions of the deal binding?
   
   
2. Are you trying to lay out all of the important terms of the deal, or will you wait to do that when you get to a definitive agreement?
   
   
3. Is there a period when the parties will exclusively negotiate to get to a final binding agreement?
   
   
4. What are the conditions to getting to a final deal?
   
   
5. If there is a dispute that comes up regarding the letter of intent, how will it get resolved (arbitration or litigation)? Where will it get resolved, and what law will govern?
   
   
6. Is one party or the other free to immediately abandon negotiations at any time?
   
   
7. What key representations and warranties is one party expecting to get?
   
   
8. What compensation is one or the other side entitled to? Is it clearly laid out or calculable?

Read our Nine Tips to Create Better Contracts for guidelines that apply to your letter of intent and other crucial business agreements. Also, to cover the legal uncertainties of electronic communication, you might want to read the answer to the common question, "Can an email agreement be a binding contract?"

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