A letter of intent (LOI) is a letter addressed by one party to another party expressing its willingness to enter into a business transaction with that other party. The letter sets out the principal terms and conditions that will form the basis for the agreement to be entered into at a subsequent date.
Uses of Letter of Intent
These letters are most often used in banking transactions to convey the terms and conditions for the sanction of banking facilities. But such letters are also issued in cases of mergers and acquisitions, investments by venture capitalists, entering into joint ventures, etc.
Effect on the contract
Acceptance of the letter is critical for proceeding to the next stage of the transaction. In case any of the terms is to be modified, it will be necessary to issue a modification to the LOI. The letter of intent, and any modification thereof, should be accepted by the party to which they have been addressed. Thereafter, the parties execute a formal agreement on stamp paper of prescribed value. The agreement contains the detailed terms of the contract. The agreement includes a reference to the letter of intent and any modifications of such letter. The agreement should not contain any stipulation or provision that is contrary to the specific contents of the letter of intent.
