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A letter of intent (LOI) is a commonly used business document between two parties expressing an intention to enter into a contract at a future date. Though not legally binding, it imposes a moral commitment and is increasingly used especially in the construction industry.
Builders use LOIs to encourage contractors to start preliminary work before a formal contract is drafted. An LOI can serve as an assurance to a company that it is likely to be granted a contract and on the basis of this, the contractor can commence preparatory work before the formal contract is in place. An LOI is also used to start work on projects which are waiting for licences from various authorities.
An LOI is an important document used during mergers and acquisitions between two companies. When an LOI is drafted, it gives an idea about the progress made in the initial negotiation and helps in identifying clauses that need to be resolved and where the two parties are yet to arrive at a consensus. Confidentiality and a “no shop” clause are often included in LOIs. A “no shop” period is the time in which the seller and the buyer are prevented from negotiating with other parties.
While the LOI can set out the scope of work to be carried out and the approximate amount to be paid, it is essential to mention that it is an interim agreement and the final clauses and terms will be part of the final contract. To avoid legal issues, an LOI should be drafted by a lawyer.
• LOIs are commonly used in construction sector
• Confidentiality, ‘no shop’ clause included in LOIs
• An LOI should be drafted by a legal professional
Source: S. Dhar, Special to Classifieds
The writer is a freelancer