Letter Writing

Letter Writing

Posted by Safe In4 Hub

Legal Functions of a Letter of Intent and Writing a Letter of Intent (LOI)

Letters of Intent, legally, are the worst of all worlds. Writing a letter of intent is not to be taken lightly. In law, you either have a contract or you don't. LOI's are the legal equivalent of "almost pregnant". Letters of Intent emphatically state that that they are not formal agreements and then often proceed to set forth agreed terms of the proposed transaction. Given this paradox, if the deal goes sour, one party can argue that those agreed-upon points were, in fact, agreed upon - or, in fact, a binding contract and, in some cases, furthermore, that the party relied on the LOI and has monetary damages based on such reliance.

This is the legal problem with a Letter of Intent - you can't legally state you agree to something and then state that you don't in the same document. If the LOI is held to be binding by a court, you have a contract with general essential terms but without the many terms you would normally want in final agreements - a liability limit, warranty waivers, detailed payment and stock terms, etc. If upheld in court, you have the worst possible contract to work with - one in which either the court or the parties will have to work out all the details when the parties are at odds with each other.

If, when drafting an LOI, the author tries to remedy this ahead of time, by putting as much detail as possible into the Letter of Intent, so if upheld by a court the important clauses will be there, then that author risks greatly increased the odds of a court upholding the document as binding contract because so many of the essential terms were included.

LOI's are to be used with great caution and, whenever possible, in conjunction with serious consultation with your attorney. Nevertheless, they are a reality of the business world.

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