The Role of Letters of Intent in Negotiations

In the context of complex negotiations, it is common for parties to draft various preliminary documents to formalize their discussions. These documents, often referred to as “letters of intent” (LOIs) or “memorandums of understanding,” may also be known by other names such as “protocol,” “letter of understanding,” or “term sheet.” Although legal theory has developed concepts such as contracts “between absentees,” contract promises, and the doctrine of culpa in contrahendo, it often remains insufficiently equipped to address the many complications that can arise during negotiations.

A Letter of Intent (LOI) is a preliminary document that outlines the key terms of a proposed commercial agreement between parties. It is one of the most important pre-contractual instruments, particularly in complex transactions such as mergers, acquisitions, and joint ventures. The LOI plays a fundamental role in establishing a framework for future negotiations, enabling the parties to clarify the elements that will form the basis of their final contract. It signals a willingness to move toward a formal agreement, but the issue of its binding nature remains critical.

Generally, an LOI is perceived as a non-binding agreement. Its nature is often that of a provisional expression of intent to begin negotiations for a future contract. Parties can clearly express their desire for the LOI not to be legally binding by including language such as “subject to contract” or “this LOI is not intended to create any binding obligation.” However, this non-binding perception can be challenged when the terms of the LOI, or specific clauses within it, imply legally enforceable obligations.

For example, an LOI may become binding if it outlines essential terms and conditions of the proposed deal, as illustrated by a decision of the Versailles Court of Appeal on April 8, 2014 (No. 13/03008). In this case, involving two holding companies, the court ordered the first party to pay the second €400,000 in compensation for loss of opportunity due to the failure of a transaction that could have generated substantial gains. This ruling highlights the critical importance of careful and balanced drafting of LOIs, especially to avoid faults or breaches during the pre-contractual negotiation phase.

In another domain, the French Court of Cassation illustrated in its October 11, 2017 ruling (Civ 1, No. 16-24.533) how a letter of intent, initially seen as non-binding, can give rise to legal obligations. Two sisters had expressed in a letter their “intention” without commitment to allocate a portion of their father’s inheritance to their brother. The Court held that this declaration of intent transformed a natural obligation into a civil one.

To avoid ambiguity, parties often include specific clauses in LOIs, such as those on confidentiality, exclusivity, or dispute resolution mechanisms. For example, an arbitration clause stipulating that any dispute will be resolved through arbitration can create a binding arbitration agreement from the moment the LOI is signed.

In summary, a carefully drafted letter of intent with clear and precise terms can significantly influence the success of negotiations and the legal security of the parties. It should establish a shared understanding without unintentionally binding the parties to terms that still require formal agreement.