You may have heard of these things called letters of intent (LOI). Someone may have sent one to you.

What are you suppose to do with it? What is it? Why they are sending it to you? Are you entering into a contract without knowing it?

Don’t worry. A LOI is not a contract, at least not by itself. And it is rare that your silence or inaction will create a binding contract (although there are a few limited cases such as sending out a reward poster, but I digress as it is not relevant here).

So, if a LOI is not a contract then why would you want to send it out to anyone?

A LOI can do a lot in the way of communications by providing some record that a verbal conversation actually took place. Verbal conversations are still common in the business world. That may present problems down the road as memories tend to fade or become distorted over time (or worse, people lie!). A verbal contract can be a binding contract on both of the parties, but if each has their own version of the terms, the court may look to other information to determine what the terms of the agreement were.

To help avoid a clash of “he said, she said” or from memories fading, one party may want to put the discussion, agreement, or introductions into a writing that they send to the other party. By itself this writing is generally not a binding contract. In fact, it likely has no legal effect at all. However, what this writing does is provide some evidence that the parties did meet and maybe some agreement was reached. It’s up to the court to decide if they want to accept the LOI.

When a LOI is sent by one party to the other party, but the other party does not respond, that will not signal much in the way because there is a lack of bi-lateral communications. If the other party responds to the LOI agreeing that was what was discussed in the meeting, then there is a stronger case to be made as to the importance of the LOI. A court may even ask about the LOI and ask whether the opposing party had an opportunity to read its contents.

It may not be a contract, but another benefit of a LOI can be to help put preliminary terms together for a later contract. Also, having a writing of the terms that have already been agreed and/or discussed can help make future meetings more productive. At the next meeting the parties can focus on problem areas or changes that should be implemented in the final contract or discuss additional terms.

You don’t need a lawyer to create a LOI. A LOI can be as simple as an email to the other person explaining what was discussed and the date and time of the meeting.

Another use for a LOI is if you are trying to pitch a sale to a client, a LOI can help show-off/demonstrate your professionalism and your interest in the client. The LOI can signal to the client that you are taking their business serious and have serious plans to work with them in the future. This type of LOI is referred to as a LOI to negotiate a business transaction (MOU-Memorandum of Understanding). The LOI - MOU follows the same principal as the traditional LOI, but is more for someone looking for a more formal platform to send out to potential clients or to retain existing clients. There is no contract or even any binding promises. It is simply a letter detailing one party’s intent to start talking business.

A LOI can be useful despite its lack of legal bite.



This blog entry was written by Sanket Mistry.

Sanket Mistry, J.D., M.I.A.      Sanket Mistry is the founder and CEO of Peerless Legal and blogs regularly. He has written numerous books including, "25 Estate Planning Forms," "8 Living Trust Forms," "Simple Will Creator," "Give Through a Will & Living Trust," and "Guidance On Creating Your Own Will & Power of Attorney," and the bestselling books in the Legal Self-Help Guide series, "Will, Trust, & Power of Attorney Creator and Estate Records Organizer" and "Estate Planning in Plain-English." He earned his JD from the Walter F. George School of Law at Mercer University and is a member of the New York State Bar. He has worked, and volunteered, at a number of nonprofits, government agencies, and for-profit corporations. He also holds a BA in philosophy from Emory University and a MIA from Columbia University. He is an avid traveler and tennis player.