Letter of Intent to Do Business Non Binding
A letter of intent to do business non binding is a type of contract that comes before the official agreement.3 min read
A letter of intent to do business non binding is a type of contract that comes before the official agreement. It outlines the agreement between two entities before everything is finalized so the entities can make sure the terms are to their liking. If one or both entities do not agree to the terms, they can negotiate easier.
The main points usually found in a letter of intent include:
- Timeline of the agreement.
- Due diligence.
- An overview of the transaction and structure of the agreement.
In most cases, letters of intent are used by investment bankers on behalf of corporate issuers.
Difference Between Binding and Non-Binding Provisions
A letter of intent can be either binding or nonbinding. There's no such thing as a letter of intent that's only a little binding.
Parties use nonbinding provisions to show their good faith in the other party as well as their commitment to the agreement. Nonbinding provisions also provide a good basis for negotiations. That way, parties can find out any potential deal breakers before committing any finances to the agreement.
Finally, nonbinding provisions are a good way to share important information with the regulators, investors, and lenders that will be involved with the transaction.
Binding provisions have a little more restrictions. For one, you will not be able to share or disclose details of the negotiation process. Second, you won't be able to consider or accept any proposals from a competing party.
Because binding provisions also place time limits on due diligence efforts, negotiations take less time. Finally, binding provisions also require a nonrefundable deposit so the two parties confirm their interest in the deal.
The Importance of Creating a Sound Letter of Intent
You won't need to use a letter of intent for every deal you make. However, when you do, you need to be careful when drafting the letter. If you draft your letter of intent and mistakenly believe it is nonbinding, you can actually be bound by provisions you never intended to follow through with.
An example of this is a recent case in which two parties were in a protracted negotiation. They used interim agreements to create the basis of the agreement, with the idea that they would eventually firm down the agreement in a more comprehensive written document. However, a federal court ruled the interim agreements they had were legally enforceable despite the parties' intent to create a written agreement in the future, and the courts awarded the affected party $15.9 million in compensation.