Letters of Intent: Creating Inadvertent Obligations

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Parties have long used letters of intent, term sheets and memorandums of understanding (otherwise known as “LOIs”) to express a preliminary interest in a transaction and to outline the general business terms of the potential transaction. LOIs save parties time and money, as they allow the parties to identify and resolve high level business issues before drafting more detailed transaction documentation. Since LOIs are often signed before the parties have hammered out the details of the transaction, the parties generally do not intend to create legally binding obligations (other than with respect to certain limited provisions addressing such matters as confidentiality and exclusivity). It is not uncommon, however, for parties unwittingly to create legally binding obligations in a hastily crafted LOI. If all or part of the LOI is determined by a court to be legally enforceable, a party that walks away from subsequent negotiations may be surprised to find itself liable for monetary damages.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Joshua Schneiderman | Attorney Advertising

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