Penning a well-worded letter of intent is one best practice. It formalizes business relationships between parties and, with a professionally drafted letter, can even increase chances of a successful partnership.
However, many people have often debated the legality of a letter of intent. So, is a letter of intent binding? If so, what are the elements that will make a letter of intent legally binding? We’ll comprehensively address all these questions for your contract management in this article.
What Is a Letter of Intent?
A letter of intent (LOI) is a non-binding document that expresses an intention to pursue a partnership deal with another party. However, the recipient who signed the letter may still be legally bound depending on the provisions outlined in the letter.
Case in point: this formal document is considered binding only if an unambiguous provision specifying the agreement’s enforceability is present.
Moreover, a letter of intent serves as a preliminary document and a starting point for negotiations. Aside from business-to-business transactions, a letter of intent is commonly used with job and college applications, and seeking government services.
In the United States, a letter of intent is sometimes interchangeably used with a memorandum of understanding (MOU). The latter is a nonbinding document that describes the outlines of an agreement before a final binding contract is made.
When Is a Letter of Intent Binding?
Are letters of intent binding? In many cases, it is considered non-binding. For a letter of intent to qualify as such, it all boils down to the contents of the proposed agreement. The language to be used is also crucial in making a typically unenforceable document to hold up in court.
As such, a letter of intent is binding if there is a provision that explicitly declares that it’s legally valid. Furthermore, demonstrative actions taken after a signing has transpired are also crucial in rendering this document type admissible in court.
Elements of a Binding Letter of Intent
A binding letter of intent contains certain elements that must be fulfilled to establish its legality. These are:
- Parties involved. The letter must make it clear who are the parties involved in a particular or proposed transaction. A clear identification of concerned parties is one basic requirement to fully enforce a formal agreement.
- Description of the letter. The LOI must also detail out a concise but thorough description explaining the nature and intent of the document. This includes the transaction type, such as whether it’s an asset or stock purchase, pricing, and any other significant information.
- Terms and conditions. The inclusion of terms and conditions in an LOI is suggestive of a need for the document to hold legal bearing. With that said, terms and conditions must be distinctly specified in such a manner that no discrepancies may occur.
- Confidentiality. A binding LOI must encompass a confidentiality provision. This is to ensure that both parties’ sensitive data, trade secrets, and personal information are utterly safe from public disclosure.
- Termination. Essential to every type of contract is a termination clause. The letter, then, must clearly define under which circumstances the agreement may be terminated. For example, state that the contract is grounds for termination should either party breach terms specified in the document.
- Applicable laws. Ideally, the proposed agreement should also specify any applicable laws for the specific transaction. This provision is essential to prevent or resolve legal disputes that may arise down the road.
- Signatures. Critical to the evaluation of whether an agreement is binding is the presence of signatures. It can be signed manually or electronically, which is just as enforceable as its ink-based counterparts.
Binding vs. Non-Binding Letters of Intent
A binding letter of intent comprises the elements mentioned above. The letter must consist of a detailed description of the letter, terms and conditions, confidentiality and termination provisions, and signatures. Without these indispensable elements, a letter of intent will not stand a chance in a court battle.
A non-binding letter of intent, on the other hand, lacks a categorical provision stating that the letter is binding. Moreover, an LOI is not considered binding if there are no further steps or actions taken after a formal signing. Finally, an ambiguous description of the agreement’s intent adds up to its unenforceability.
Differences Between a Binding Letter of Intent and a Contract
A binding letter of intent and a contract are both documents with legal validity. But the two also differ in terms of legal status, degree of enforceability, specificity, and even negotiability, among others. Below is a list of the differences between contracts and binding letters of intent.
Letters of intent serve as a preliminary document to a more serious and fully enforceable agreement down the road. A contract, meanwhile, is the aforementioned fully enforceable agreement that will require both parties to fulfill their contractual obligations.
While both documents contain sufficient details describing the agreement, letters of intent tend to be less specific. Contracts comprise multiple provisions that oftentimes necessitate a few pages longer than LOIs. For this reason, contracts are more specific, and rightfully so.
All contracts, provided its key elements were satisfied, are fully admissible in court. Letters of intent are often unenforceable due to a lack of provisions specifying its validity. For the latter to warrant a court investigation, the document must contain what all binding contracts are made out of.
This includes unambiguous terms, a clear statement asserting both parties’ willingness to be bound by the agreement, and legible signatures.
In the event of a contract breach, the erring party may need to pay fines and suffer reputational ruin. A breach in a letter of intent may also result in damages. However, this largely depends on whether there is a clearly outlined provision stating the letter’s bindingness.
How You Can Create and Manage Binding Letters of Intent With Fill
With more businesses joining the digital wave, the need for software solutions to streamline contract management couldn’t be more emphasized. Fill is one of the best paperless tools across numerous industries and types of contracts. For creating and managing binding letters of intent, Fill can tremendously help you with the following:
Professionally drafted templates
To create a binding letter of intent, you can make convenient use of our free, customizable templates. These templates are pre-made and designed to provide a professional-looking agreement letter to uniquely reflect your brand.
Top-notch security features
It’s not enough that you have well-drafted LOIs. It’s especially important that all your contracts and legal documents can only be accessed by authorized employees. Your LOIs are completely secure with our multiple layers of authentication and verification features.
This includes uploading a selfie, valid ID, and digital signature comparisons to spot identity impersonations.
Real-time audit trails and logs
When tracking LOIs sent to a party, there’s an effortless way to check whether it’s been successfully received or opened. It’s possible using our real-time audit trails and logs. With it, never not worry whether your LOIs are already accessed or otherwise ignored. You can also receive real-time notifications and alerts to track document progress.
Centralized, cloud-based storage
Paper jams add up to office clutter. Using digital solutions like Fill allows you to safely store tons of legal documents in a centralized online repository. Our cloud-based storage can also be used for file backup and internet archiving.
Binding electronic signatures
Finally, Fill is an industry leader when it comes to providing 100-percent binding electronic signatures. Fill complies with all eSignature laws supporting digital signature use as a valid equivalent to using wet signatures. With our online platform, you can virtually request clients to sign and send your LOIs back anytime, anywhere.
Draft and Manage Letters of Intent with Ease Using Fill
Bid goodbye to papers cluttering your desk and switch to using Fill for your contract management needs. With our free and customizable templates, you can create and draft LOIs that are designed to win business partnership deals.
Invest in a digital solution that can truly deliver and help you in streamlining your contract management workflow. Use Fill to expertly draft and manage your contracts and agreements. Sign up for free and get in touch with us today.