When Does a Letter of Intent Become Legally Binding?

A letter of intent (LOI) is generally not legally binding, but it can become enforceable if the language or context suggests a firm commitment. The document’s wording and the history of dealings between the parties often determine whether it’s binding.

Courts have sometimes enforced LOIs when they clearly outlined essential terms or when one party relied on them in good faith. To avoid unintended obligations, parties should use clear, nonbinding language and specify which sections, if any, are meant to be legally enforceable.

Discover more about a letter of intent and when it becomes legally binding.

Legal Interpretation of Letters of Intent

A court relies on two factors when determining if a letter of intent is binding:

• Written expressions of intent present in the letter
• Demonstrative actions taken by both parties after the letter is signed

If the letter is treated as a contract, then it could be ruled binding.

It is also important to understand the relationship between the two parties. If two parties draft and sign an ambiguous letter of intent but have a history of nonbinding agreements together, then it is likely that the court will rule the most recent letter as also being nonbinding.

Business etiquette and protocol can be a determining factor. For example, most mergers and acquisitions begin in earnest with a term sheet, which functions as a letter of intent. The term sheet states the intentions, purchase price, and payment terms. However, term sheets are almost always nonbinding. Courts will likely take this precedent into consideration.

When Is a Letter of Intent Nonbinding?

Suppose a letter of intent is nonbinding, but one company incurs costs or devotes resources only to eventually have the deal fall through. In many cases, there is no recourse for losses incurred. However, it is possible that the breaching party could be found to have failed to negotiate in good faith.

These laws are ambiguous and likely depend on the jurisdiction and the type of letter of intent.

For example, in 2012, the Delaware Supreme Court approved recovery of “benefit of the bargain” damages between two companies in a mergers and acquisitions deal in the case of SIGA Technologies, Inc. v. PharmAthene, Inc.

Diverse Applications of Letters of Intent 

Beyond the business world, letters of intent are used by individuals seeking government grants and by some people applying to colleges, such as varsity athletes, who want to state their commitment to attend a certain school.

In some cases, a letter of intent can be used by a parent to specify their wishes for the care and well-being of minor children should the parent die. In this case, they are not considered legally binding, such as a will, but will sometimes be considered by family courts when making determinations about the children’s care.

The Bottom Line

A letter of intent (LOI) can be binding or nonbinding, depending on how it’s worded and how the involved parties act post-signature. Courts assess an LOI’s legality by examining the language used in the document and the conduct of the parties after signing. A history of nonbinding LOIs between the parties might influence a court to rule an LOI as nonbinding.

Business deals, such as mergers and acquisitions (M&A), commonly start with LOIs, which are often considered nonbinding unless specified otherwise. Nonbinding LOIs carry risks; parties may incur costs without recourse if the deal fails, though issues like failing to negotiate in good faith might be contested, varying by jurisdiction.