According to the USA Law of Contracts, as well as for the Italian and European legal system, a Letter of Intent (also known as “Memo Deal”, “Memorandum of understanding”, “Statement of Principles” o “Head of Agreement”) is a pre-contractual legal document that outlines an agreement between two or more parties before the agreement is finalized. Generally a Letter of Intent has an organizing goal and it is not binding upon the parties, having the purpose to clarify the key points of a complex transaction for the convenience of the parties, to declare officially that the parties are currently negotiating, as in a merger or joint venture proposal, or to provide safeguards in case a deal collapses during negotiation.
The Letter of Intent instrument is pretty common for the drawing up of international agreements, above all in the field of IP Law (i.e. transfer, licensing, distribution of patented products), where the parties reached an understanding on the whole (i.e. term, territory, price, products, etc.), but there still are a lot of other conditions to be defined. A Letter of Intent must be followed by a definitive agreement, in order to give efficacy to the entire agreement.
Notwithstanding, in the light of recent judicial sentences, both Italian and foreigner, the simple titling of the document as “Letter of Intent” is not sufficient to totally exclude a binding agreement, in the case the signed document fully expresses the precise willing of the parties, such as a provision immediately effective.
For this reason, and to avoid that the Letter of Intent becomes a binding agreement, it should be expressly specified that the document “is not binding between the parties” and it should be provided a specific clause about the effects the parties want to give to the document.
A Letter of Intent about the distribution of patented products should include the following minimum elements:
- Statement of not-binding understanding;
- Description of the products and approximate price (these are better arranged in a exhibit);
- Term of the definitive agreement;
- Territory;
- Exclusivity or not;
- Warranties of clear and marketable title;
- Date for definitive agreement signature;
- Non-competition clause;
- Confidentiality;
- Break-up fee.
In case of signature of the definitive agreement as established in the Letter of Intent, the willing of the parties will be transfused in the definitive agreement and consequently the Letter of Intent will lose its effectiveness. Otherwise, in the case the definitive agreement is not signed, according to Italian Civil Law there could be a case of pre-contractual liability (art. 1337 Civil Code), and/or contractual liability in relation to the binding obligations arising from the Letter of Intent. For this reason it is always advisable to establish the applicable Law and Jurisdiction.