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Letters of intent are risky business; avoid them

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If you're involved in a negotiation to sell or buy a business, equipment, goods or services, you may be asked to sign a letter of intent (LOI).

Should you? Probably not. Here's why:

LOIs are becoming a more common part of negotiations. Many large companies use LOIs when dealing with small suppliers. They aren't an official contract, just an unofficial indication of your intentions in a negotiation.

The problem: Courts are traditionally unpredictable when it comes to ruling whether an LOI is a binding agreement. And you could be required to follow through on the LOI, even if the court rules that it's not a binding agreement.

Some judges see LOIs as a mix of specifics and ambiguities that make it unclear whether the document is an enforceable contract, so they let juries decide. Some jurors believe that businesses wouldn't draft such a detailed document unless they mean it to be legally binding.

Example: A dispute over an LOI regarding a deal between American Realty Trust (ART) and the Hampstead Group went to court. The court eventually ruled that the LOI wasn't binding because ART's president kept the LOI secret from his fellow executives. But the court did say that the LOI could bar ART from negotiating a deal with other potential partners. (American Realty Trust v. Matisse Partners, No. 03-10462, 5th Cir., 2003)

Advice: Watch out for potential business partners who try to pitch LOIs as tools to mold discussions for a final agreement. You could inadvertently be walking into a binding deal.

Also, don't be fooled by boilerplate LOI disclaimers such as, "does not address all of the terms and conditions to which the parties must agree upon to become binding." LOIs commonly repeat such phrases several times. But that won't offer ironclad legal protection.

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