In the early stages of contractual negotiations, parties might prepare a letter of intent. A letter of intent enables parties to set out the basic terms of an agreement before formalising a final contract. This is similar to a memorandum of understanding. You can use it in various transactions, such as acquiring or selling shares, real estate, and construction agreements. Of course, the terms you use in a letter of intent will differ depending on the situation. However, the purpose is to kick-start a transaction and ensure all parties are on the same page. This article will take you through four benefits of using letters of intent for your business transactions, so your agreements benefit your commercial interests.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
1. Sets Out Key Terms
A letter of intent allows parties to establish the agreement’s critical terms before finalising the contract. This is beneficial because it ensures that both parties are on the same page and have the same objective. In addition, by having this preliminary discussion, future negotiations will likely proceed quickly, thereby saving time on lengthy back-and-forths.
2. Defines Expectations
Another benefit of using a letter of intent is that it defines the expectations of both parties. Letters of intent will usually include a proposed timeline of the agreement. This timeline might set a date negotiations should conclude or anticipated dates for milestones in the transaction more broadly.
Continue reading this article below the form3. Protects Parties’ Confidentiality and Exclusivity
A letter of intent’s main benefit is providing clauses that benefit both parties. For example, parties often include a confidentiality clause in a letter of intent. Where negotiations do not result in an agreement, this confidentiality clause will ensure that any private information disclosed will remain protected.
Letters of intent might also include clauses that allow for exclusivity. By doing so, negotiating parties cannot negotiate with others in the early stages of the negotiation process. This is beneficial because it removes potential bargaining tools and ensures that parties do not rush into including certain contractual terms due to third-party pressure.
4. Structures Negotiations
Finally, a letter of intent can help provide structure to contractual negotiations. Specifically, a letter of intent will usually include the key terms of an agreement, a timeline for negotiations and initial due diligence work. Therefore, if negotiations become stagnant later, referring to the letter of intent will help move things along and progress the agreement.
Similarly, a letter of intent can serve as a guide for parties. As a ‘summary’ of the negotiations, you can use a letter of intent to present the structure of the agreement to relevant stakeholders, such as shareholders or professional advisors.
Important Considerations
Although Australian courts generally presume a letter of intent is not legally binding, the courts have sometimes found otherwise.
This example highlights how important it is to ensure that you clearly express your intention to be bound or not bound by your letter of intent. Put simply, if you want to express your intent without being bound by the letter, then you need to state this clearly. For this reason, you must seek specific legal advice about the content of any letter of intent you agree to. A lawyer can identify potential issues that may arise in drafting the letter and ensure that you properly reflect your position in the letter’s wording.
Key Takeaways
A letter of intent is a valuable tool that lets parties set out the basic terms of an agreement before formalising a final contract. There are several benefits to using a letter of intent such as setting out the terms of the agreement and defining each party’s expectations. Furthermore, you can establish clauses that are useful for both parties, such as confidentiality and exclusivity clauses. Additionally, it will allow you to define the structure for negotiations.
If you need help preparing a letter of intent, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A letter of intent enables parties to set out the basic terms of an agreement before formalising a final contract. The terms used in a letter of intent will differ depending on the situation, with the general purpose being to kick-start transactions without the official contract.
There are many benefits to using a letter of intent. Specifically, a letter of intent allows parties to set out the terms of an agreement early in the negotiation stages. It also defines the expectations of each party. Finally, a letter of intent also enables parties to establish useful clauses for both parties, such as confidentiality and exclusivity clauses and define structure to negotiations of the agreement.
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