You may have heard of a letter of intent (LOI). Just the name should tell you, this isn’t a contract. It’s a “letter,” and the word “intent” would indicate that you’re just saying what you intend to do in the future—not what you mean to be bound by now.
Yet, these documents are commonly used in business transactions, so they clearly must have some legal significance. For more information, our Chicago business litigation lawyer at Ellis Legal continues below.
A Statement to the Future
As the name implies, a letter of intent is a letter that says what a party intends to do in the future, usually expressing an intention to enter into a contract in the future.
Why not just enter into the contract now? Because in some cases, parties need more information before they enter into a contract, such as conducting research or due diligence, or perhaps some outside contingency must occur or not occur, before the parties can be truly bound.
So, in the meantime, they express their intentions through a letter of intent.
Let’s say that two parties are in talks to purchase an Illinois business. But as with any business purchase, a lot of hurdles and legwork needs to be done. The parties may need to look up liabilities or liens, review financial records, or work out financing, among all the other steps that go with purchasing a business.
So, the parties would sign a LOI that details what will happen during this due diligence period. The LOI would lay the groundwork for the parties’ duties and responsibilities during the due diligence “pre-contract” period.
Yes, You Can be Bound
The LOI is not a contract. Parties can be bound by some of the terms in the LOI.
In our example, the LOI doesn’t obligate anybody to buy or sell the business. But it could give time limits to investigate the business, or impose strict confidentiality on the parties during the due diligence period, or require one party pay expenses related to due diligence. It could require deposit moneys, or the forfeiture of the deposit under certain conditions.
So, there are enforceable “contractual” provisions, within this LOI, which itself is not a fully binding contract. Obviously, what terms are binding and legally enforceable in a LOI, and what isn’t, is largely based on the wording of the agreement, which is why a LOI needs to be drafted carefully (and read carefully).
The Later Contract
If everything goes fine, and the parties want to continue to a full-fledged contract, the LOI will often say that the parties will negotiate and come up with that contract. Of course, nobody is obligated to sign anything. The LOI, by its nature, can’t bind someone to sign a contract that doesn’t yet exist.
That means there is still some leeway for a party to back out of a future deal, subject to any penalty provisions that may have been written into the LOI.
Questions about the contracts related to your business transaction? We can help. Speak with a Chicago business litigation attorney at Ellis Legal at (312) 967-7629 today.