Letters of Intent and Term Sheets

The important principles of letters of intent and term sheets are not dissimilar to the standards you learned in high school. Both letters of intent and term sheets are essentially outlines of a contract that is yet to be drafted by the parties. They provide the most important parts of the agreement between the parties in much the same way that an outline of a research paper provided you with a guide to your final paper. 
What are Letters of Intent and Term Sheets?
Letters of intent and term sheets are very similar. Both documents outline an agreement that two or more parties expect to make. A letter of intent, as the name implies, is written in the form of a letter whereas a term sheet is more often a list of the important parts of the anticipated contract or agreement. 
Generally, letters of intent and term sheets are used for one of a few purposes including:
  • To clarify complex terms that will later be included in a contract;
  • To provide notice that the parties are officially negotiating with one another; or
  • To provide certain safeguards in case the negotiating parties do not end up entering a contract.
Often, business letters of intent are used when one party intends to acquire another party, when two or more parties intend to merge or when two or more parties intend to embark on a joint venture. Forms are available online to draft letters of intent and term sheets and these documents do not usually require formal execution in the presence of witnesses.
Since letters of intent and term sheets are, by definition, written before a formal and binding contract has been executed, many of the elements included in the letter of intent or term sheet are not binding on the parties. The terms that explain what the parties anticipate agreeing to or hope to achieve are not binding, for example. However, terms that relate to the negotiations themselves are usually binding and one party may sue another and recover damages if those terms are breached. 
The legally binding terms may include:
·         non-disclosure agreements to prevent parties from sharing confidential information with third parties;
·         a covenant to negotiate in good faith; and
·         exclusive rights to negotiate that prevent parties from negotiating with other parties while they are negotiating with each other.
What Happens After Letters of Intent and Term Sheets Have Been Written?
After a letter of intent or term sheet has been written, the parties still have a lot of work to do. A contract must still be negotiated and properly executed in accordance with state law in order for the agreement of the parties to be binding. Letters of intent and term sheets are not substitutes for contracts. Letters of intent and terms sheets provide the benefit of providing clarity to mutual understandings in the often complex world of business negotiations but it is important to remember that they are limited in that they do not fully reflect enforceable agreements between the parties. 

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.

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