Letter of Intent vs Contract: Is an LOI Legally Binding?

Is an LOI a Contract?

Generally, no — an LOI is a statement of intent, not a binding agreement. Courts look at: (1) Did the LOI state it was non-binding? (2) Were the essential terms (price, subject matter) defined or still being negotiated? (3) Did the parties act as if they had a deal? If the LOI says "This is a non-binding expression of interest and creates no legal obligations" — it is almost certainly not a contract. If it says "The parties agree to..." and both sides start performing — it might be binding.

What SHOULD Be Binding in an LOI

These four provisions should always be explicitly marked as binding: 1. Exclusivity: Seller won't negotiate with other buyers for X days (typically 30-90). Protects the buyer's due diligence investment. 2. Confidentiality: Information shared during due diligence is confidential. 3. Break-up fee: If seller backs out after the buyer spends on due diligence, seller pays a fee (typically 1-3% of deal value). 4. Expenses: Each party pays their own costs — or one party covers both if they withdraw without cause.

What Should NEVER Be in an LOI

Never put binding price terms, binding payment schedules, or binding delivery obligations in an LOI — those belong in the definitive agreement. An LOI is a roadmap to a deal, not the deal itself. If you start listing binding commercial terms, courts may find the whole document is a contract.

The Danger Zone: Performing Before Signing

The fastest way to turn a non-binding LOI into a binding contract: start performing. If you deliver goods or services based on the LOI, and the other party accepts them, you may have an implied contract — on terms you never finalized. Always sign a short-form agreement before starting any work based on an LOI.

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