What Is a Letter of Intent? Binding Clauses to Check

A letter of intent (LOI) is a short document in which two parties set out the main terms of a deal they intend to negotiate, before they sign the full contract. So what is a letter of intent in legal terms? Usually a roadmap, not a commitment: most of it is non-binding, but a few clauses, typically confidentiality, exclusivity and costs, can bind you the moment you sign.

I am not a lawyer, and this is not legal advice. I am an operations manager who has had to sign, and push back on, a fair number of these.

What does a letter of intent actually do?

An LOI records where the negotiation stands. It names the parties, describes the deal in a few lines (a supply agreement, a partnership, an acquisition, a lease), and lists the points both sides have already agreed on: price range, timeline, scope, who pays for what.

You will also see it called heads of terms, a memorandum of understanding or a term sheet. The labels vary by country and by industry, and the label itself matters much less than the wording inside. A document titled "Memorandum of Understanding" can be fully binding. A document titled "Contract" can say it binds nobody.

The practical job of an LOI is to stop everyone wasting time. Before lawyers bill hours on a 40-page agreement, both sides confirm they are talking about the same deal. If the price or the delivery date is a deal-breaker, you find out in week one, not week eight.

Is a letter of intent legally binding?

The honest answer is that it depends on the wording, and on the country. In most EU and UK contexts, an LOI is not binding as a whole, but individual clauses can be. Baker McKenzie's global M&A guide notes the usual exceptions: exclusivity, confidentiality, governing law and costs.

Here is how that split typically looks in practice.

Non-binding by design: the headline price, the structure of the deal, the expected timeline, the commercial terms you still have to hammer out.

Binding in many LOIs: a confidentiality obligation, an exclusivity period (you agree not to negotiate with anyone else for 30 or 60 days), who pays the advisers' costs if the deal collapses, and which law and courts apply.

The trap is that a court looks at what the parties meant and did, not just at the label. In English law, "subject to contract" is a strong signal that the main deal is not yet binding, but it is not conclusive. If the terms are specific and both sides start acting on them, a judge can find an enforceable agreement you never planned to make.

Which clauses in an LOI should you read twice?

Three kinds of clauses deserve a slow read before you sign.

The binding-effect clause. Look for a sentence that says, in plain words, which parts bind and which do not. A good one reads like this:

This letter is not intended to create legal obligations, except for clauses 5 (Confidentiality), 6 (Exclusivity) and 8 (Governing law), which are binding.

A vague one says "the parties intend to proceed in good faith" and leaves everything else to interpretation. Skip signing until that sentence is precise.

Exclusivity. This is the clause that costs real money. If you grant 90 days of exclusivity and the other side drags its feet, you have frozen your own options for three months. Check the duration, whether it renews automatically, and whether the other side has any obligation to move at a set pace.

Costs and break fees. Some LOIs quietly say that you reimburse the other side's legal and due-diligence costs if you walk away. Sometimes that is fair. Sometimes it is a penalty dressed as a formality. Check whether it is capped.

Does "negotiate in good faith" bind anyone?

Often less than people think. Under English law, there is no general duty to negotiate in good faith, and courts have refused to enforce a bare promise to do so. In Shaker v VistaJet (2012), the High Court held that an agreement to negotiate in good faith and use reasonable endeavours was unenforceable, because a judge has no objective test for what good-faith negotiating looks like. You can read the Clifford Chance briefing on Shaker v VistaJet for the reasoning.

Other jurisdictions go the opposite way. Swiss, German and Austrian law, for instance, recognise pre-contractual duties (culpa in contrahendo): break off talks abruptly after the other side has spent real money in reliance on you, and you can owe damages. That is exactly why the governing-law line in an LOI is not boilerplate.

In practice, this means one thing: do not treat a good-faith sentence as protection, and do not treat it as harmless either. Check the governing law, then ask what the clause could mean under that law.

What are the most common mistakes with LOIs?

The first is treating "non-binding" as "harmless". A non-binding LOI still shapes the negotiation: whatever you accepted in it becomes the baseline, and walking back from a price range you signed is harder than it looks. Read the commercial terms as if they were already in the final contract.

The second is signing an LOI with no expiry. Exclusivity without an end date is the worst version, but even a silent LOI can be cited months later as proof of what the parties agreed. Add a clause saying the letter lapses on a fixed date unless extended in writing.

The third is skipping the confidentiality clause because "it is only a letter". You are often sharing financials, customer lists or product plans at this stage. If the confidentiality obligation is missing or one-sided, you carry the exposure. A separate NDA is common, and it is fine, as long as one of the two documents covers it.

The fourth is letting different people negotiate the LOI and the final contract. Terms drift. Keep a short list of the points the LOI settled, and check the draft contract against it line by line before you sign.

When is a letter of intent worth signing?

An LOI earns its place when the deal is complex, expensive to negotiate, or needs a window of secrecy. Think acquisitions, joint ventures, large supply or distribution agreements, commercial leases, and anything where one side will spend serious money on due diligence.

Skip it, or keep it to one page, when the deal is simple. For a standard freelance engagement or a small purchase, an LOI doubles the paperwork without lowering any risk. A short proposal and a clean contract do the job.

There is also a case where an LOI hurts: when one side uses it as leverage. If a vendor asks for exclusivity before they have shared a price, you are being asked to commit before you can compare. Refuse the exclusivity, or make it conditional on a price by a fixed date.

How do you read an LOI without a legal background?

When I started reviewing these documents, I read them top to bottom like a letter. That is the wrong method. A better one takes about ten minutes.

First, find the binding-effect clause and mark every clause it names as binding. Those are the only ones that can hurt you immediately. Second, read exclusivity, confidentiality and costs in full, then write down the date each one ends. Third, read the governing-law and jurisdiction lines. Fourth, check the expiry: an LOI with no end date can sit in a drawer and come back to bite you.

Everything else, the price range and the timeline, is context. It matters for the negotiation, but not for what you owe if the deal falls apart.

An AI contract-review tool can speed up the first pass. It flags binding wording, long exclusivity windows and one-sided cost clauses so you know where to focus. It does not replace your counsel on a large deal: it tells you where to look, and a lawyer tells you what it means for you.

What should you do with an LOI you were just sent?

If you need templates or a quick check by a licensed attorney on a modest deal, a document service can be enough.

If the LOI turns into a full contract that needs drafting, quotes and signatures in one flow, a document platform keeps everything in one place.

Whatever tool you use, three actions cover most of the risk. Ask which clauses bind, in writing, and get that sentence into the document. Put an end date on exclusivity and confidentiality. Have your counsel read it before signing when the deal is large or the exclusivity is long.

Letter of intent, term sheet, MOU: does the name matter?

Not much. What matters is whether the text says it creates obligations, whether the terms are specific enough to enforce, and how you behave after signing. A term sheet tends to be more detailed and is common in venture financing. An MOU is more common between organisations and public bodies. Heads of terms is the usual UK phrase for property and commercial deals.

If you remember one thing, make it this: read the binding-effect sentence first, because it tells you what you actually signed.