Letter of Intent

A Letter of Intent [LOI] is a document outlining the status of agreement between two or more parties before a contract has been finalised and which aims to give some comfort to one or both parties that they can anticipate a contractual agreement will be forthcoming. Whether called a letter of intent, heads of agreement or memorandum of understanding, the parties want to signal that negotiations are proceeding and they need to record the status of their negotiations such as what has been agreed, perhaps to allow one party to commence work before the final contract is agreed. This can present a number of problems. First, if the terms are poorly worded, it may be unclear as to whether the parties intend to be bound by the Letter of Intent. Second, the Letter of Intent may actually become a contract and commit the buyer to something that they did not intend to be legally binding. Third, contracts can take an inordinate amount of time to emerge from the governance process, and what was implied by the Letter of Intent, i.e. ‘please start work as we will probably enter into a contract with you, but we want you to commence work without a formal legal commitment’ may have to be unwound if the contract is not approved in governance, or the buyer changes plan before the contract emerges from their own governance processes. See also Representations, Pre-contractual.