A letter of intent (LOI) in business is a short preliminary document that captures the key terms two parties have agreed to before they commit the time and money to negotiate a full contract. Most of what it contains, including price, closing date, and asset descriptions, is non-binding. But a handful of provisions, typically confidentiality, exclusivity, and expense allocation, are enforceable the moment both sides sign. That split is what makes the document useful, and it’s also what makes careless drafting expensive.
What a Letter of Intent Covers
An LOI reads like a formal letter, usually from buyer to seller, laying out the shape of a proposed deal in plain language. It names the parties (using the exact legal entity names on file with the state, because getting the wrong entity on the signature line creates confusion about who actually owes what), states a price, and describes what’s being bought.
Price can appear as a flat figure, a multiple of earnings, or a formula that adjusts at closing. One asset-acquisition LOI filed with the SEC set the purchase price at $25,000 with a dollar-for-dollar adjustment tied to net asset value at closing: if net assets came in $5,000 above the baseline, the price moved up $5,000, and vice versa.1SEC.gov. Exhibit 10.1 Letter of Intent Pricing mechanics show up this early because fighting about them later, after both sides have spent money on lawyers and accountants, is far worse.
Beyond price and parties, a typical LOI addresses:
- An exclusivity period (a no-shop clause stopping the seller from entertaining competing offers, often 30 to 90 days).
- A due diligence timeline for the buyer to examine the seller’s financial records, contracts, and operations.
- Confidentiality obligations covering information disclosed during negotiations.
- Conditions to closing, such as board approval, financing, or regulatory clearance.
- Expense allocation during the pre-closing period.
- A termination or sunset date that automatically ends the parties’ obligations if no definitive agreement is signed in time.
In an asset deal, the LOI also lists what’s actually transferring — tangible items like equipment and inventory alongside intangibles like trademarks, domain names, customer lists, and intellectual property — and what liabilities, if any, the buyer is picking up.
Which Parts of an LOI Are Binding
This is the question that trips up most people, and the answer is almost never “all of it” or “none of it.” Courts split the document into two categories.
The deal terms — price, closing date, descriptions of what’s being bought — are almost always non-binding. Either side can still walk away from the transaction itself.
The process terms — confidentiality, exclusivity, expense provisions, and the obligations governing how the parties behave during negotiations — are almost always enforceable the moment both parties sign. If a seller signs an exclusivity clause and then secretly negotiates with a competing buyer, the harmed buyer can seek reliance damages covering wasted legal fees, accounting costs, and due diligence spending. Courts have also issued injunctions ordering a breaching party to stop talking to the interloper.
Well-drafted LOIs state the split outright. One SEC-filed example read: “Except for paragraphs 6, 7, 8, and 9 of this LOI (which are legally binding upon execution of this LOI), this LOI is a statement of mutual intention; it is not intended to be legally binding.”2SEC.gov. Non-Binding Letter of Intent The same filing specified that any binding obligation about the actual transaction would arise only when the parties signed the definitive agreement. Naming the binding paragraphs by number is the clearest way to prevent later arguments about what the parties meant.
When an LOI Accidentally Becomes a Full Contract
An LOI meant to be non-binding on its deal terms can still be enforced as a contract if a court concludes the parties actually reached a complete agreement. Judges weighing this question look at the specific language used, whether any essential terms remain open, whether either party partially performed, the surrounding negotiations, and whether deals of that type usually require a formal written agreement. An LOI that covers every essential term and sounds final can bind the signers even if they expected to execute something more polished later.
The textbook example is Texaco v. Pennzoil. In 1984, a Texas jury found that an “agreement in principle” between Pennzoil and Getty Oil was a binding contract, even though both sides expected to sign a formal merger agreement afterward. When Texaco acquired Getty instead, the jury awarded Pennzoil $7.53 billion in compensatory damages and $3 billion in punitive damages. The punitive portion was reduced on appeal and the case ultimately settled for $3 billion. The lesson registered across the deal-making world: if your preliminary document reads like a final deal, a court might treat it as one.
Certain phrases raise the risk. “The parties agree to” sounds like commitment; “the parties intend to” does not. Definitive statements of obligation without conditional language sound binding. Calling the document an “agreement” rather than a “letter of intent” or “proposal” nudges a court in the wrong direction.
Language that pulls the other way works. An LOI that states it “does not constitute a binding contractual commitment” and that binding obligations arise “only upon execution and delivery of the Definitive Agreement” is much harder to enforce as a complete contract.2SEC.gov. Non-Binding Letter of Intent
Good Faith and Promissory Estoppel
Even an LOI that clearly disclaims binding deal terms can expose a party to liability through two separate doctrines.
The Uniform Commercial Code imposes an obligation of good faith in the performance and enforcement of every contract.3Legal Information Institute (LII) / Cornell Law School. UCC 1-304 Obligation of Good Faith Whether that obligation reaches pre-contract negotiations under an LOI is less settled. Some courts have held that an LOI containing language about negotiating “to completion” or “to a definitive agreement” creates an enforceable duty to negotiate honestly, even though it doesn’t force the parties to close. Other courts have been reluctant to recognize that duty unless the LOI explicitly creates it. The safe assumption is that if your LOI promises you’ll negotiate toward a deal, a court might require you to do so in good faith.
Promissory estoppel is the second route. If one party makes promises during the LOI period that the other reasonably relies on to its detriment, the promising party can be liable for the resulting losses even without a binding contract. The classic scenario: a seller turns down competing offers and spends money preparing for closing based on the buyer’s assurances, and the buyer then walks away for reasons unrelated to the deal’s merits. Courts can award reliance damages in that situation, covering expenses the harmed party incurred because it trusted the promise.4Legal Information Institute (LII) / Cornell Law School. Promissory Estoppel
How to Keep the Binding Line Clear
A few drafting habits dramatically reduce the risk that an LOI becomes something you didn’t intend.
Say which paragraphs bind. Name them by number. State that everything else is a statement of intent and that binding obligations on the transaction itself arise only when a definitive agreement is signed and delivered.
Use “intend” rather than “agree” when describing deal terms. Reserve “agree” for the paragraphs you actually want enforceable, like confidentiality and exclusivity.
Call the document a letter of intent or a proposal, not an agreement, in both the title and the body.
Include a termination or sunset date. Without one, exclusivity and confidentiality could theoretically run indefinitely, and sorting that out later costs real money even if no court would ultimately enforce it that way.
Address what happens if the deal collapses: who bears which expenses, whether any break-up fee applies, and what obligations survive termination.
LOI, Term Sheet, and MOU
Three preliminary documents cover overlapping ground, and the labels get used loosely.
A letter of intent reads like a formal letter from one party to the other, uses plain language to describe the proposed deal in broad strokes, and gets revised back and forth until both sides sign.
A term sheet is more like an outline. It uses bullet points for each key term, tends to run more detailed than an LOI, and often covers business and legal points in a format that translates directly into contract language. Term sheets are standard in venture capital and loan financing, and they also appear in mergers and acquisitions.
A memorandum of understanding reads like a traditional memo and describes the transaction at a practical level. MOUs are most common in joint ventures and strategic partnerships. The important thing to know: MOUs are sometimes drafted as fully binding agreements, not just negotiation frameworks. If someone hands you an MOU, read the binding language before assuming it works like an LOI. The assumption that preliminary documents are always non-binding can be an expensive mistake.