How to Draft a Letter Of Intent

The letter is widely used in business negotiations to summarise the main elements of a potential deal. LOIs are important when two parties are originally brought together to work out the broad strokes of a contract before settling on the details. An LOI has certain criteria, obligations, timelines, and persons involved. Many letters of intent (LOI) include non-disclosure agreements (NDAs) and no-solicitation terms. Letters of intent are also used outside of business when two people wish to collaborate or make a transaction.

The objective of a Letter of Intent (LOI)

Different parties may employ letters of intent for a variety of purposes. An LOI can be used by parties to define some of the basic, essential principles of an agreement before negotiating and finalizing all the finer points and specifics. Furthermore, the LOI can be used to indicate that two parties are negotiating a transaction, such as a merger or joint venture (JV). Overall, LOIs strive to accomplish the following:

• Determine which critical aspects of a transaction must be negotiated.
• Protect all of the parties involved in the transaction.
• Announce the nature of the transaction, such as a joint venture or a merger of two businesses.

Legal Effect of LOI

According to Indian law, an agreement to ‘agree’ is not enforceable and does not bestow any rights on the parties. A letter of intent also generally shows a party’s intention to enter into a contract with the other party in the future, according to established legal principles. A letter of intent is not meant to bind any party to engage in a contract. However, such non-binding letters of intent can sometimes take on a hybrid form in which parties agree to be bound by certain stipulations such as confidentiality, exclusivity, costs/expenses, governing law/jurisdiction, and so on.

Normally, if a letter of intent or any other contractual document expressly declares that no contractual obligations are created between the parties, it is assumed that no legitimate and binding contract has been formed. However, if the language of the letter of intent or other contractual document is unclear in this regard, the question of whether or not a binding contract has been completed remains open for judicial review on a case-by-case basis. During such an assessment, the parties’ intentions, the nature of the transaction, the language used in the letter/document, the parties’ subsequent actions, and any ancillary facts and circumstances are frequently considered.

How to Draft a Letter Of Intent

• Introduction: In the body of your letter, include pertinent background information about your organization and its successes. Highlight your skills and unique selling aspects that make your company a suitable partner. In basic detail, define both parties as well as the broad outlines of your planned connection and potential transaction. You should explicitly state that this is ‘subject to contract’.
• Pre-Conditions: Clearly state the terms and circumstances of the proposed commercial transaction or partnership. Make sure you include important details like deadlines, responsibilities, budgetary considerations, and particular requirements or expectations. Preconditions may include the production of important documentation such as safety or patent certifications. The intention of each party to conduct due diligence before entering into a legally binding contract is commonly included. This includes any steps that must be taken before proceeding with negotiations. This part lays the groundwork for future negotiations and establishes the tone for subsequent discussions.
• Timeline and closure date: Give each side a timeline within which to complete the listed preconditions. A letter of intent is valid for the duration of the parties’ talks. However, providing a closing date is standard and indicates when the parties anticipate to cease their discussions.
• Clauses that are or are not legally binding: You should include a clear declaration that the agreement is not legally binding, but you may choose to add legally binding clauses to a letter of intent, including:
  • Confidentiality – establishing legally binding requirements of confidentiality or ‘non-disclosure’ between parties
  • Non-solicitation – prohibiting both parties from poaching each other’s personnel
  • Exclusivity entails prohibiting parties from negotiating with anybody else for a set length of time; this should include a fair time limit. 
  • Provisions for non-completion – detailing remuneration if one party works to advance the transaction.
• Express commitment and next steps: End your letter of intent by expressing your enthusiasm for the potential collaboration or transaction. Highlight the advantages and synergies that can be gained by collaborating. Briefly describe the next steps you propose, such as organizing a meeting or asking for more information. Each party must sign the letter of intent.

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