04 - Precontractual Obligations and the LOI

What are the risks associated with negotiations? With advanced negotiations, often a letter of intent is concluded between the parties.  A Letter of Intent should not justify an obligation, to conclude a later contract. However, this is not guaranteed simply by the designation as a “letter of intent”, or “declaration of intent”. When drafting a Letter of Intent, it must be sufficiently stated that it is a non-binding declaration of intent, in order to avoid unwanted obligations.

If the content of the Letter of Intent, in addition to the essential contractual provisions, also reflects a corresponding will to be legally binding, it may already be a binding, preliminary contract or even the main contract itself. The parties must actually treat the Letter of Intent as a non-binding declaration of intent, e.g. they must not counteract it, by demanding the other party, e.g. with the requirement to begin with the performance. Otherwise, the alleged letter of intent, could be interpreted as a binding preliminary contract, or as an option, or even anticipate that the main contract is already concluded.

According to Section 311 of German Civil Code, an obligation already exists for the parties, if they commence contract negotiations. “The obligee, is entitled to demand performance from the other contracting party, according to § 241 BGB, whereby each party is obliged, to take into account of the rights, legal, and further interests of the other party.

With a Letter of Intent, it makes therefore sense, to define the interests of the parties. A violation of the requirement, of acting in good faith, or defiance from general principles, can lead to a claim for damages. A premature, unilateral termination, or the lack of a response to performance expectations, can also lead to claims for damages. Depending on the wording, a Letter of Intent may well contain other enforceable obligations. It is customary for secrecy and exclusivity, to be agreed as binding. A breach of these obligations, regularly leads to a claim for damages.