In what way does a letter of intent (LOI) differ from a formal contract?

A letter of intent (LOI) primarily serves to outline the preliminary agreements and intentions of the parties involved without creating binding contractual obligations. This characteristic distinguishes it from a formal contract, which is typically legally binding and contains enforceable terms regarding the parties' rights and responsibilities.

The essence of an LOI lies in its function as a tool for negotiating and clarifying the intentions of the parties before they establish a formal contract. It may outline key points of agreement and primary terms, setting the stage for future negotiations, but it does not impose legal duties in the same way that a formal contract does. Therefore, its purpose is more about establishing mutual understanding and outlining intentions rather than creating enforceable obligations at that stage.

Other options suggest scenarios that either misrepresent the nature of an LOI or associate it with characteristics that do not capture its fundamental purpose—such as being legally binding, only involving financial agreements, or representing a finalized contract when, in fact, it is typically a precursor to such a contract.