Practical international trade law - Letters of Intent
Companies that enter into negotiations with foreign companies are often asked to sign a so-called Letter of Intent. With some awareness of the legal and practical significance of such a document, both legal and practical problems can be avoided.
A Letter of Intent is a type of document that is frequently used in international contract negotiations (LOI, Memorandum of Understanding and MOU are examples of other names used interchangeably on similar types of documents). These types of documents can be useful for structuring and making progress in the negotiations. However, it is important to be aware of the potential legal and practical implications of such documents before signing.
There is wide variation in how specific terms are within the Letters of Intent that we see. One extreme is that the document says nothing more than that the parties should explore the possibilities for cooperation within a given area. At the other end of the scale, we see documents where all the main terms of a contract are already specified, and little else remains than to agree on a final contract document for the more detailed provisions.
We often see an explicit reservation in a Letter of Intent, which is that the parties will not be bound until there is a signed final contract, but we also see quite often that there is neither such a reservation, nor any mention of the parties' right to cancel the negotiations or change the commercial terms. It appears that many commercial parties view a Letter of Intent as non-binding, and therefore consider the precise wording as being of less significance. This can create difficulties down the line.
A critical example is that there may be nothing in the Letter of Intent to confirm which country's law it is subject to, or which country's courts (or arbitration tribunal) have jurisdiction in case of disputes. That may seem natural where the parties consider the document to be informal and non-binding, yet these matters may actually be crucial in determining whether the Letter of Intent is indeed binding or not, and what obligations (if any) are imposed on each party. Different legal regimes may impose significantly different requirements for determining whether a binding agreement is entered into, as well as different rules of interpretation and which evidence may be adduced to support a party's position.
For instance, under the law of some countries, such as England, the parties would generally not be considered bound by the terms of a Letter of Intent unless it is clear from the wording of a particular clause that the parties have intended to be bound by that clause, or unless the parties commence performance of the planned terms. Under the law of other countries, such as Norway, the parties may in principle be considered to be bound when they appear to have agreed on all essential points of an agreement, although not all terms have been clarified and the final signed agreement does not yet exist.
When it comes to lack of a jurisdiction clause, this can potentially lead to parallel legal disputes in several jurisdictions, as the parties may have different opinions on which jurisdiction would be the correct (and most favourable) one as venue for the dispute.
Accordingly, while a well drafted Letter of Intent can be helpful for structuring and making progress in the negotiations, a lack of care when drafting can lead to one or both of the parties suing in their own or another country. This would typically be to recover the alleged loss caused by an agreement not being entered into in accordance with the alleged contents of a Letter of Intent. Such claims can potentially be extensive.
In addition to the legal risk, it is important to be aware that a Letter of Intent may create a gap in the expectations of the parties, with one party considering the essential terms of the document as agreed, while the other considers the parties free to withdraw or introduce new or change essential terms of the Letter of Intent. This can damage both the further negotiations and the relationship between the parties.
Tips for mitigating the risk of legal or practical complications when drafting a Letter of Intent
- Write explicitly in the Letter of Intent (i) which provisions are binding (for example, the governing law and jurisdiction/dispute resolution clause and confidentiality) and (ii) which are the non-binding intentions of the parties (for example, commercial terms that require negotiations, research or approvals).
- If the parties are meant to have a completely discretionary option to exit the negotiations before entering into a final contract, this should be explicitly stated. For example, a provision may be included in the Letter of Intent which states: "Further negotiations and any contractual agreement will depend on a comprehensive strategic and commercial assessment which is up to each party to conduct at any time. This Letter of Intent does not entail any commitment to further negotiations or contract conclusion". Alternatively it might provide: "The parties shall negotiate in good faith for a period of 30 calendar days, and shall thereafter not have any further commitment."
- For increased predictability of the legal implications of a Letter of Intent – specify the governing law and jurisdiction.
Practical international trade law is a series of tips and articles published by Wikborg Rein. The content is not intended as legal advice, but as general practical tips based on Wikborg Rein's experience within international trade law. Read more about our international trade law practice.