WHAT IS A LETTER OF INTENT (LOI)?

A Letter of Intent (LoI) is a legally binding agreement between two or more parties with an intent to formalize the understanding between them. The letter outlines the chief terms of a prospective deal. The concept of a Letter of Intent is similar to that of a  Memorandum of Understanding, Terms Sheet or Heads of Agreement and is mostly used in huge business transactions. It can be iterative in nature i.e. a party to the agreement may offer certain specifications or ideas in the letter which can be countered by the other parties either by alterations or by forming a new letter altogether. This is done so that neither of the parties are startled with the terms of agreement while finalising the deal.

Certain LOIs include  Non-Disclosure Agreements (NDAs), which clearly define the components of the agreement that are to be kept confidential, and which components can be shared publicly. This forbids the parties from causing unnecessary complications and also provides no-solicitation provisions to protect the employees of each party from getting poached.

LOIs are not necessarily related to business deals and can be used beyond that world. For example, parents may draft a  Letter of Intent expressing their expectations from their children in the event of their deaths. It is to be noted that these are not wills or any kind of legal documents, however, they can be heard by the family court judges.

In the business world, these letters are drafted by the legal team of the company and can be used for getting grants from the government for their mergers.

PURPOSE OF A LETTER OF INTENT

• To declare officially that the parties are negotiating
• To safeguard the employees of each party
• To formulate terms and conditions before entering into a business contract
• To provide safeguards in the event of the cancellation of the agreement
• To safeguard the confidential  information
• To provide equal opportunities to the parties to put forward their terms of the agreement

CONTENTS OF A LETTER OF INTENT

• The objectives should be elaborated. Major projects should be described succinctly. 
• The letter should be brief and concise. It should contain all the necessary details like the name of the company, the motive of the agreement etc.
• It is a business letter. So, it must have a business letterhead and the format should be well checked.
• Commonly used terminology like “Dear Sir” should be avoided
• The LOI received from the other party should be reviewed thoroughly to ensure that all requirements have been met.
• While  signing the letter,  proper business salutations should be used.

Letter of Intent, or LOIs, run the gamut from statement of purpose to graduate schools, cover letters to prospective employers, and letters to obtain funding. However, what all of these have in common is a succinct yet detailed description of the aims and objectives. Sometimes the letter is accompanied by a request to fulfill those objectives and plans.

TYPES OF A LETTER OF INTENT

• JOBS & CAREERS: While applying for jobs, a letter of intent expresses the intent to work in that company along with the required qualifications. It usually acts as a cover letter stating the reasons for application for a position. 

• BUSINESS TRANSACTIONS: In the business arena, a letter of intent acts as a pre contractual agreement that proposes the terms and conditions of a contract. Business LOIs can be of different kinds- assurance letters, mergers or framework letters.

• EDUCATION & ACADEMICS PURSUITS: An academic LOI should contain the courses done by the student. The candidate must convince the admission committee that he would be an asset for the community.  It should contain relevant extra curriculars, publications in the field and why the candidate has chosen that school to pursue their studies. 

A Letter of Intent is often confused with an Offer letter. However, the two are different from each other. The Letter of Intent is simply a statement that one party intends to sign a contract with the other and is not legally binding, whereas, an offer letter has a legal significance because it creates a legal relationship between the two parties (i.e. offeror and offeree) once the offeree communicates the acceptance to the offeror. That legal relationship forms a ‘contract’ between the two parties.

Since, a Letter of Intent is not as formal as a contract it is assumed to be not legally binding. However, there are certain instances in which the provisions under the Letter of Intent can be legally binding. For example- the provision to keep the negotiations confidential is legally binding. Hence any Letter of Intent that is not legally binding usually has this explicit statement included in it :

“The proposed terms of this letter of intent are non-binding and for discussion purposes only. It is the intent of the parties that these terms and conditions may be modified or changed, in whole or in part, pending a binding agreement to be negotiated and executed by the parties. Furthermore, nothing in this section shall be interpreted as obliging any of the parties to enter into any agreement.”

The basic format of a Letter of Intent as shown in the given image clearly portrays that the letter should be brief and well formatted to describe the necessary details in a very succinct manner.

-Ridhika Kapoor.