A short guide to the contract type declaration of intent, including their purpose and how it differentiates itself from a declaration of will.
A letter of intent is a declaration without common legal consequences. By this, a letter of intent is not binding. A letter of intent is typically used to communicate the intention and determination to form an agreement without committing directly yet. It is used both in a private and occupational context, while the latter is the most common context.
One is not bound by a letter of intent, unless it contains a promise. This is both applicable, both for the approval of a price in conjunction with a sale, or in the event of a mutual interest in working together. It is important to keep in mind that the price is not binding and that the agreement generally contains no guarantees.
In principle, one can use a letter of intent for all kinds of agreements, but some are more common than others. The most common is to comprise a letter of intent preceding a cooperation agreement, a purchase and sales agreement or a transfer of shares in a company, where the intention is to first perform due diligence.
One should keep in mind, that parts of a letter of intent can be binding. Occasionally, a non-disclosure agreement regarding the protection of business secrets may be included. There have been examples in recent years, where letters of intent have been interpreted as binding in case law. This is due to the lack of specific legislation regulating this field. Typically, it depends on how it is worded. The softer the wording, the less binding it is. There are benefits in using a template for a letter of intent, which will give you a standardized wording. However, this is not a guarantee.
A letter of intent is a kind of gentlemen’s agreement that demonstrates the seriousness of both parties in a business deal. This way, you avoid wasting time and money on potential buyers. It also provides a level of security, especially by including a non-disclosure agreement.
At the same time, it is a clever psychological trick, because it indirectly compels the counterpart to enter into an agreement. No one is bound by a letter of intent, but it serves to document interest. This also helps in showing other potential buyers that there is competition. It is helpful, if you want to raise the price for your own product or perhaps compel others to come to an agreement more quickly.
In a certain way, a letter of intent is an announcement of negotiations. Hence, you can also use a letter of intent as a draft, before the final agreement is negotiated. In the event that you are negotiating a big agreement, there can be a lot of minor aspects to take into account. In this case, the letter of intent serves as an overarching foundation for discussing the minor aspects during the negotiation. During negotiations, a letter of intent would provide assurance, allowing you and your counterpart to test each other and reach a final agreement, since both of you signed that you are interested in the transaction.
Above, you will find a template for a letter of intent that you can use in your everyday work. Complete it directly by filling in the boxes, using your digital signature and storing it in Contractbook’s cloud.
When you intend to buy a company, you can also comprise a letter of awareness. With that, you announce ownership of a company, if the company reaches certain predetermined expectations. If you issue a promise, you are - by common Danish contract law - obligated to fulfil said promise. This results from the Contract Act.
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