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Is your letter of intent binding?

Is your letter of intent binding?

Every business deal has its potential pitfalls. Mistakes can be made or parties may realize the results of their envisioned deal aren’t going to deliver what they hoped for. What you don’t want is for those problems to land you in expensive and time-consuming litigation. Letters of intent are often used to help avoid worst-case scenarios, but they come with their own hazards.

Letter of intent explained

The idea behind a letter of intent is fairly straightforward – the parties involved are hoping to conclude a deal of some kind and a letter of intent helps them achieve that goal. An LOI can ensure that they are on the same page as they proceed through negotiations, with an eye toward formalizing a contract down the road. Identifying the parties, the subject matter of the deal and any other necessary details can help them achieve a meeting of the minds, so that no one feels they’re wasting their time or resources.

When is a letter of intent legally binding?

In short, a letter of intent can be binding in Michigan, even it was never intended to be so. Michigan courts will treat an ‘agreement to agree’ just like a formalized contract, depending on the circumstances surrounding the letter of intent. In fact, the more specific an LOI is, the more likely a court is to treat it as binding.

Most of the time, the parties to an LOI do not intend for it to be binding. Or at least, not entirely. Sometimes there are certain provisions, such as an intent to negotiate in good faith, which the parties do want each other bound by. Clear language as to whether all or part of an LOI is intended to be binding will be your best friend.

In any case, when you are contemplating using an LOI in an upcoming business deal, you should have it reviewed by a knowledgeable professional. While they can be a valuable tool to achieve your goal, an LOI can create bigger problems down the road if it’s not drafted correctly.