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A letter of intent is an instrument by which an individual or an entity expresses its intention to enter into a contract with another individual or entity for any contemplated transaction. It is neither an offer or a promise to carry out the contemplated transaction, nor does it form a legally binding contract. It is an instrument laying out the basic terms and conditions that shall be applicable to a contemplated transaction if carried out. However, a letter of intent does not express the certainty of the transaction but informs the interested parties of their obligations, terms and conditions which may be applicable if the transaction is carried out.
A letter of intent can be used for different types of transactions and is named differently for convenience. The employer issues the letter of intent to hire prospective employees; most government companies enter into a memorandum of understanding with the party they intend to transact with; and even the private equity investors issue letter of intent, known as ‘term sheet’, for laying out the basic terms to be incorporated in the final transaction document.
1. Is a letter of intent binding on the parties, can I file suit for its enforcement?
According to various judgments, a letter of intent has been held as non-binding on the parties. However, where the letter of intent incorporates the following clauses, the parties may be bound by it
1.1 All the elements of a valid contract
1.2 Detailed rights and liabilities of the parties
1.3 Do not refer to a future agreement
1.4 Each party acts on the representation of the other party
Hence, depending on the facts and circumstances of the case and language used thereto, a letter of intent may bind the parties. It is therefore advisable to seek legal advice to protect your interests.
2. When is a letter of intent preferred?
A letter of intent is preferred where the terms and conditions of the contemplated transaction are uncertain and the parties are unsure as to the performance of the specific activity. It is an instrument for negotiation and is used to capture the essential terms of the transaction.
3. By what other names can a letter of intent be referred to?
A letter of intent can also be referred to as:
3.1 Intent to Purchase Letter
3.2 Side letters
3.3 Letter of Interest
3.4 Term Sheet
3.5 Memorandum of Understanding
3.7 Assurance Letter
3.8 Framework Letter
4. Which transactions require the use of a letter of intent?
While there is no hard and fast rule for issuing a letter of intent, they are typically issued for the following purposes
4.1 Employment and recruitment
4.2 Bulk sale and purchase of goods and services
4.3 Private Investments
4.4 Government contracts
4.5 Institutional financing