What is the legal significance of a “letter of intent”?

A letter of intent (LOI) primarily serves as a preliminary document indicating that the parties involved have reached a mutual understanding or agreement on certain terms while expressing their intention to formalize those terms into a legally binding contract later on. This document is often used to outline the key elements of the agreement, such as the scope of work, important deadlines, and general expectations without yet committing to the final details of a contract.

By signaling preliminary commitment, it plays a critical role in the negotiation process, providing a foundation upon which to build more detailed and legally enforceable agreements. This means that while it is not binding as a contract, it is a strong indicator of the parties' intent to move forward and fosters cooperation and compliance as they negotiate further.

The accuracy of this choice stems from the fact that letters of intent are typically non-binding; they do not finalize terms but express the desire to formalize the agreement later, allowing parties time to finalize the specifics in a more formal contract.