When two or more parties want to have a written document concerning the details of a possible transaction between them; they may create a document known as a letter of intent. The most attractive feature of this document is that it can provide the details of a possible relationship and is non-binding. A letter of intent can define a business relationship prior to a contract being created and executed. This is an agreement designed to reach an agreement.
Purpose of a Letter of Intent
A letter of intent template makes it possible to formalize the issues and the essential elements of a future business relationship. It will enable the parties to clearly communicate and establish their position on issues as well as expectations concerning any agreements that will take place. It is an effective tool that can be used to establish issues and negotiate a future agreement.
All the parties involved in a transaction can use a letter of intent to move closer to a final agreement. It will eliminate any inaccuracy as well as ambiguity. When an attorney is involved, they will be able to make corrections and create a final agreement that is acceptable to all the parties involved. A letter of intent will emphasize that it is not binding. Most formal contracts will state that any previously negotiated points such as with a letter of intent are completely canceled, and only the points in the formal contract are binding. The goal is to keep the contractual relationship clear by eliminating anything in the letter of intent that the parties agree is unacceptable.
Many people include a section that states commitments reached in the letter of intent will only be binding should all the parties involved agree to enter into and execute a separate but definitive agreement. Only the executed definitive agreement will contain all of the terms and conditions agreed to by all parties. The definitive agreement could also contain sections that were not in the letter of intent but were subsequently negotiated in good faith.
There are some situations where a letter of intent is drafted in a way that all parties agree to be bound by it. The letter of intent will then become a legal contract. It is possible to have language in the letter of intent to make this possible. In most cases, it will happen with the terms are detailed and clear. No vagueness or uncertainty exists in it. All of the provisions desired in a definitive agreement are in the letter of intent. This can happen when there is no desire on the part of any of the parties to create a definitive agreement. All parties are comfortable with their legal rights as well as obligations contained within the letter of intent.
It is often important that a letter of intent contain covenants. These are sections that will cover issues such as non-solicitation of employees, information confidentiality, who are suppliers as well as customers and more. A covenant could also describe how lost profits or recovery of costs will be handled between the parties. The issue of how a breach of an agreement could be handled should be specifically described. Parties will often request that certain covenants listed in a letter of intent be included in a final agreement.
One of the main reasons to have a letter of intent template is to decrease transaction costs. Using this makes it possible for parties desiring a business relationship to confirm the intent and seriousness of the other parties. It also provides a way to view how the relationship would work with a definitive agreement. When a detailed document is provided at the start of the negotiating process, it speeds up the process significantly. It establishes a framework for the business relationship.