Many of my Houston business clients have expressed apprehension when it comes to drafting and signing letters of intent. This may be because LOIs can resemble contracts in many ways. And while business professionals understand the importance of recording the terms discussed in negotiations, they often feel that the signing of documents should wait until there is a true contractual understanding.
Letters of intent are widely used in business to accomplish a variety of objectives. The following items are some of the elements that Texas business executives might include in a standard letter of intent.
Terms and Conditions: A LOI can establish the details of a pending business transaction that will be blessed with a contract. For example, if a Houston project manager wants to subcontract an electrical company to wire a building, they can form a letter of intent to define the manner, time frame, and specifications in which the work will be completed should both entities sign a contract in the future.
No-Shop Agreements: A letter of intent can include language that prevents one or multiple parties from obtaining quotes or otherwise negotiating with outside entities during the current discussion. No-Shop agreements generally have a time frame attached to them. The no-shop agreement doesn’t require the parties to form a contract with one another; it merely prevents them from dealing with other, similar companies.
Conditions to Close: A LOI can outline the parameters that must be met for a deal to move to the contractual phase. For instance, a letter of intent can be used to hire an employee pending the successful completion of a background check.
Avoiding Having Your Letter of Intent Become a Contract
Special care should be taken by the attorneys who are drafting letters of intent to clarify to the parties—and later the courts because these “agreements” can end up in court—that the LOIs are not intended as contracts. Language needs to be clear and unambiguous. To this aim, business attorneys will often include specific language stating that the LOI does not contractually bind the parties to the transaction being negotiated. Many attorneys will also leave out specific terms and conditions to further demonstrate that the LOI is not intended to be a contract. Furthermore, there is no legal requirement that letters of intent must be signed. With this in mind, it’s important to note that a signature is not always required to bind parties to a contract. However, any language stating that the LOI is not enforceable until signed should go a long way in removing any question that a contract has been formed in it’s unsigned state.
Before signing or committing to a contract or letter of intent, you should first have a reputable Texas business attorney review it.