Are you negotiating terms with another party but have not yet signed a formal agreement? It is a useful tool that you can use to It is important that this is a legally non-binding document drawn up before the contract is entered into. Understand the proposed terms and establish the underlying intentions between the parties to establish the business relationship. So what are the benefits of using a letter of intent?
1. Establish Common Intent
As in any business transaction, it is of utmost importance that both parties understand the other’s goals and intentions. This can be difficult, but a letter of intent can be a great asset to your business relationship. Without clear terms and effective communication, a deal can fail. This is why the letter of intent is so useful. Parties can simply state their requirements and expectations. As a result, this establishes a common intent for future engagements.
What’s the difference between an agreement and a formal contract? The main difference is that agreements are binding while agreements are not legally binding. Further, the Letter of Intent may not contain specific terms or promises contained in the contract. For more information, see our guide, When to Use Memorandums of Understanding (MOUs) Instead of Contracts.
2. Mitigate the Risk of Uncertainty
Business negotiations can be volatile and uncertain. They can be especially blurry at the beginning of a relationship between the parties. There is nothing worse than arguing with a business partner about the terms of a contract. A letter of intent therefore provides excellent protection for reducing the risk of uncertainty in expectations and goals. This is especially beneficial in commercial partnerships and relationships where the commitment is long term. Setting clear expectations and ambitions in the initial negotiations can avoid disagreements between parties. It can also reduce the risk of uncertainty when drafting formal contracts. This is because the proposed terms have already been established and agreed upon by the parties.
3. Record of Previous Agreements
During the course of negotiations, two or more parties often agree on certain terms that will appear in future contracts. So what happens if a party withdraws or forgets these terms? This is where the MOU comes in. This document is not legally binding, but is useful because it describes what was agreed upon during negotiations. This therefore ensures a clear understanding between the parties regarding their common goals. Additionally, a letter of intent is beneficial because it allows the parties to securely communicate confidential information. This is a particularly valuable document when forming partnerships.
4. Ease of contract termination
As noted above, a letter of intent can promote good relations between the parties because the terms are clearly stated. Not sure if you want to contact someone? An agreement is a good place to start because it indicates what both parties want to achieve from the agreement. It’s now much easier to break the agreement if you find that your goals don’t line up. Unlike written agreements, formal contracts are legally binding. Therefore, if you wish to cancel after the contract is concluded, you will need to complete the formal cancellation procedure. This can be more complex, stressful and possibly costly.
5. Provide a framework for future business
Even for the most experienced companies, it can be difficult to secure formal contracts when projects are complex or long-term. So a declaration of intent can give you a sense of security. Where the proposed terms have already been set in previous documents, this provides a framework for future transactions. The agreement can be used as the basis for future contracts. It can also be used as a reminder of the parties’ goals and intentions in case of ambiguity. In complex or high-risk situations, it’s always best to be on the safe side. Having a formal document in advance ensures that the parties are on the same page
