# Letter of Intent (Heads of Terms)

Source: https://contracko.com/clause-library/letter-of-intent

# Letter of Intent (Heads of Terms)

Records the parties' intention to negotiate a deal and which terms are already binding.

## What it is

A letter of intent (LOI), term sheet or heads of terms records the main commercial points the parties intend to agree and frames the negotiations. It is usually mostly non-binding, but certain provisions (confidentiality, exclusivity, costs and governing law) are normally made binding.

## Why it matters

An LOI aligns expectations early and protects sensitive information during talks. But under Dutch precontractual good-faith doctrine (HR Plas/Valburg), breaking off advanced negotiations can create liability, so the document must state clearly what is and is not binding.

## How to apply it

- State explicitly which clauses are binding and which are subject to contract.
- Make confidentiality, exclusivity and cost allocation binding from signing.
- Add an expiry date and conditions (e.g. due diligence, board approval).
- Address how either party may break off negotiations and bear its own costs.

## Negotiation tips

- • Be explicit that the LOI is non-binding except for named clauses, to limit Plas/Valburg risk.
- • Use an exclusivity (lock-out) period to prevent the other side shopping the deal.

## Common pitfalls

- • Drafting an LOI that, despite its label, is so detailed it reads as a binding contract.
- • Breaking off advanced negotiations carelessly and incurring precontractual liability.

### How Contracko helps

Contracko stores LOIs and term sheets in the same searchable repository as final contracts, making it easy to track which negotiations are still live and which have converted to signed agreements. Its AI analysis extracts the binding versus non-binding provisions and any exclusivity or expiry dates, giving deal teams an instant status snapshot without hunting through email threads.

## Legal references

- Precontractual good faith (HR Plas/Valburg)
- [BW 6:248 Reasonableness and fairness Dutch law](https://wetten.overheid.nl/BWBR0005289)

Unless marked otherwise, references are to Dutch law (Burgerlijk Wetboek, the Dutch Civil Code); EU instruments such as the GDPR apply across the EU. This is general information, not legal advice. Other jurisdictions treat these concepts differently. Verify the current text and your situation with a qualified lawyer.

## Relevant for

[Financial Services](https://contracko.com/industries/financial-services)[Commercial Real Estate](https://contracko.com/industries/commercial-real-estate)[Consulting](https://contracko.com/industries/consulting)[Manufacturing](https://contracko.com/industries/manufacturing)[Software & SaaS](https://contracko.com/industries/software-saas)

## Related clauses

- [Confidentiality Clause](https://contracko.com/clause-library/confidentiality)
- [Exclusivity Clause](https://contracko.com/clause-library/exclusivity)
- [Conditions Subsequent](https://contracko.com/clause-library/conditions-subsequent)
- [Entire Agreement Clause](https://contracko.com/clause-library/entire-agreement)

## Related terms

- [Good faith](https://contracko.com/glossary/good-faith)
- [Confidential information](https://contracko.com/glossary/confidential-information)
- [Consideration](https://contracko.com/glossary/consideration)

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## Frequently asked questions

Common questions about this clause.

- **Q:** Is a letter of intent legally binding?
  **A:** Usually only in part. Clauses like confidentiality and exclusivity bind, while the commercial deal stays subject to a final contract, if drafted clearly.

- **Q:** Can you be liable for breaking off negotiations after an LOI?
  **A:** Possibly. Under HR Plas/Valburg, ending advanced negotiations in bad faith can give rise to liability for the other party's costs or lost profit.

- **Q:** What is the difference between an LOI and a term sheet?
  **A:** In practice they are often used interchangeably. A term sheet tends to be more structured and tabular, while an LOI reads as a letter. Both serve the same purpose: recording agreed commercial points and framing the path to a binding contract.

- **Q:** Should confidentiality during negotiations be covered by an LOI or a separate NDA?
  **A:** Either approach works. A separate NDA is cleaner if sensitive information is shared before the LOI is signed. Once an LOI is in place, a confidentiality clause within it is usually sufficient for the negotiation phase.

- **Q:** Can an LOI include a lock-out clause preventing talks with other parties?
  **A:** Yes. A lock-out (exclusivity) period is one of the provisions that is commonly made binding in an LOI, preventing the other side from soliciting competing bids during negotiations. It must be time-limited and clearly defined.

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