Letters of Intent and the Deal That Half Exists

Negotiations often produce an interim document: a letter of intent, heads of terms, a memorandum of understanding. These sit in an uncomfortable middle ground.

The label does not decide the effect

Courts generally look at what the parties agreed rather than at what they called the paper. A document headed as non-binding can still contain binding commitments.

The analysis asks whether the parties intended legal relations and whether the essential terms were settled. A heading is evidence of intention but not conclusive of it.

This is why the same document can be partly binding and partly not. The exclusivity clause may bind while the commercial terms remain aspirational.

Why parties want the middle ground

An interim document lets each side justify spending money on diligence, financing or design before the full agreement exists. It signals seriousness without committing.

It also gives internal approvers something concrete to review. Boards and lenders frequently require a written summary before authorising further cost.

The clauses usually meant to bind

Certain provisions are almost always intended to take effect immediately, and they are worth identifying explicitly.

• Confidentiality over information exchanged during negotiations
• Exclusivity or lock-out for a defined period
• Allocation of costs if the deal does not proceed
• Governing law and dispute resolution for the interim document itself

Stating clearly which clauses bind and which do not removes most of the later argument. The absence of that statement is what produces litigation.

Work started before the contract is signed

In construction and supply, work frequently begins under a letter of intent while the main contract is finalised. Sometimes the main contract never arrives.

Where work has been done and accepted, most systems provide some route to payment even without a concluded contract. The measure is often reasonable value rather than the price the parties were still negotiating.

That is a worse position for both sides than a signed agreement, because the price, the specification and the remedies are all left open. It is a fallback, not a plan.

Negotiating in good faith as an obligation

Some legal systems recognise a duty to negotiate in good faith and will sanction a party that walks away abusively. Others treat an agreement to negotiate as too uncertain to enforce.

That divergence is significant in cross-border deals, because the same conduct can be actionable in one country and unremarkable in another. Which approach applies is a question for a lawyer in the relevant jurisdiction.