Welcome everyone to another edition of my Global Tech Law Newsletter. Today we are going to discuss letters of intent (LOIs). LOIs are similar to "term sheets" but usually do not have as much detail. The key feature of both is that they are framing the intent of the parties without yet creating any binding obligations. Despite the fact that a LOI or term sheet is usually executed with signatures, much like a regular contract would be.
LOIs are used in the beginning, exploratory stage when two parties start discussing the general framework of a potential transaction or cooperation.
The tricky thing about LOIs is that they can create a different set of expectations between the parties. This is based on both the starting positions of the parties (one side may want the deal more than the other) and cultural differences (in some countries LOIs engender a bigger moral commitment even if not a strictly legal one).
LOIs should be general. The more specific they are, the more they beg the question why are the parties simply not proceeding directly to a contract? And second, the more specific they are, the more one party might think there is a “meeting of the minds” and begin performance of the work discussed by the LOI which should be left for terms in a full contract.
If one party starts performing and/or relies on the LOI to make decisions, allocate resources, etc., the other party knows of this reliance, and proceeds anyway, they are setting themselves up for a potential claim down the line of detrimental reliance or unjust enrichment. Yes, even if no full and formal contract is ever signed.
LOIs can be useful in certain situations. But for the most part, unless you value the symbolic photo op signing ceremony before the hard work of negotiations that is yet to come, you might as well outline terms in a simple email exchange and proceed straight to a contract draft after that.
*This blog may be considered attorney advertising. It is for informational purposes only and does not constitute legal advice.