Letter of intent has role in good-faith negotiations

Contract Language. By Steven M. Harris, AMNews contributor. May 2, 2005.

CONTRACT LANGUAGE

A column examining the ins and outs of contract issues

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Before you sign a contract for something such as the sale of your practice, purchase of equipment, or an affiliation with another practice or health care entity, you might find yourself first signing a letter of intent.

A letter of intent, or LOI, includes terms for negotiation prior to the execution of a final binding contract.

The LOI is not a legal contract and is not legally binding, except as it relates to the negotiations between the parties. An LOI may also be known as a letter of understanding, memorandum of agreement, or memorandum of understanding.

The purpose of an LOI is to outline certain terms and conditions of a proposed transaction and provide agreement between the parties as to confidentiality, negotiations, noninfringement of third-party rights, and the primary terms that are not binding until execution of final contract.

An LOI is signed and agreed to by all of the parties to a transaction as a sign of negotiation, in good faith, of the terms and conditions of a formal agreement between the parties. For example, during negotiations for the purchase of a medical practice, the parties might enter into an LOI that outlines the proposed terms of the purchase.

The LOI might also state that the physicians shall not entertain any offers from other physicians, or participate in any discussions with other parties, with respect to the purchase of the medical practice.

Usually, an LOI establishes a negotiation deadline and LOI termination date, and identifies a dispute resolution method, or location of litigation, in the event the negotiations deadlock or the LOI is breached.