Letter of intent under Norwegian law

A letter of intent is an agreement between two or more parties expressing their intention to negotiate towards a final contract. When parties enter into a letter of intent, circumstances often prevent them from agreeing on a final contract at the present time. There may be additional negotiations pending, due diligence to be conducted, or external factors beyond their control that need clarification before they can finalize an agreement.

Letters of intent can be used in almost any field but are common in company sales, real estate transactions, and lease agreements. The agreement is not always called a letter of intent; terms like "term sheet," "memorandum of understanding" (MoU), "LoI," and "heads of agreement" are also used without significant legal differences.

1. What should a letter of intent contain?
It is not possible to exhaustively specify what a letter of intent should contain, as it must be assessed based on the specific area and circumstances. However, some elements should always be considered:

Main moints
Even if the parties are not agreed on all aspects to be included in a final agreement, they often agree on some main points. Documenting these agreed points in the letter of intent provides a common foundation for further negotiations.

Obligation to negotiate
The letter of intent should specify the conditions that must be met before the parties enter into a final agreement and on what terms the final agreement will be concluded. The degree of commitment can vary greatly—from parties being entirely free to withdraw, to specific obligations leading towards a final agreement. It is often useful to outline the timeline for further negotiations, designate responsibilities, and set milestones for various negotiation stages.

Exclusivity
A letter of intent often includes a commitment not to enter into parallel negotiations with other parties regarding the same subject matter. For example, a seller of a company may commit to negotiate exclusively with the highest bidder and refrain from negotiating with others.

Confidentiality
During negotiations under a letter of intent, parties often exchange information about trade secrets and other confidential matters. It is common for letters of intent to include provisions on how such information should be handled and the purposes for which it can be used.

Non-competition clause
A letter of intent may include an obligation not to compete with each other while negotiations are ongoing. However, if the parties are competitors—such as two competing hotel chains—such a clause is practically impossible. Parties must also consider competition law constraints before entering agreements that limit competition.

Cost allocation
Parties may incur significant costs related to investigations and negotiations of a final agreement. If a final agreement is not reached, the letter of intent should specify who will bear the incurred costs.

Choice of law and jurisdiction
In international contexts, it is crucial to specify which country's law governs the agreement and to include a dispute resolution clause.

2. Are letters of intent binding?
A recurring issue is whether letters of intent are binding between the parties. The Norwegian Supreme Court has stated that there is a presumption that parties in a letter of intent are not obligated to enter into the final agreement. However, this presumption should in our opinion not be overemphasized. It is better to consider that a letter of intent is binding according to its wording and the surrounding circumstances. The title of the document is only one factor in an overall assessment. The agreed obligations and subsequent developments may have established a contractual relationship that parties cannot freely withdraw from. Breach of a letter of intent may also lead to liability for damages. Therefore, when entering into and negotiating under a letter of intent, parties should seek legal assistance to avoid missteps.