BINDINGNESS OF A LETTER OF INTENT UNDER TURKISH LAW
A letter of intent (“LoI“) is generally a document written to outline the main terms of a potential agreement between two parties, but it is typically not legally binding.
However, whether a letter of intent is a preliminary agreement (in Turkish, “ön sözleşme”) in terms of the provisions of article 29 of the Turkish Code of Obligations and binds the parties depends on its content and the agreement between the parties.
The differences between a letter of intent and a preliminary agreement are as follows.
A preliminary agreement (or protocol) is a contract that outlines the terms of a future contract and is usually legally binding. Key differences between a Letter of Intent and a preliminary agreement are as follows:
• Binding nature: A preliminary agreement typically binds the parties legally. The parties are usually obligated to follow through with the agreement. A letter of intent, on the other hand, is not necessarily binding and simply outlines the parties’ intentions.
• Details: A preliminary agreement usually contains more detailed provisions about the future contract, while a letter of intent provides a general framework.
• Legal obligations: A preliminary agreement typically imposes legal obligations on the parties, and failure to comply with the terms may result in legal consequences. A letter of intent generally does not impose such obligations.
Indeed, a letter of intent is written as a preliminary step to outline the parties’ intentions, expectations, and general terms for a potential agreement. It is usually not legally binding, and the specific details of the agreement are typically worked out in a more formal contract at a later stage.
Whether a letter of intent binds the parties depends on its content and the agreement between the parties. The binding nature of a letter of intent can vary depending on the following factors:
• Presence of binding language: If the letter of intent explicitly states that the parties are not bound by it, such as phrases like “this letter does not create any obligation” or “this is merely a statement of intent,” the letter will not be binding.
• Inclusion of binding terms: If the letter of intent contains specific clauses that bind the parties, such as confidentiality, protection of personal data, exclusivity/ non-compete clauses, those clauses of the letter might be legally binding, even if the letter as a whole is not.
• Terms of the final agreement: The letter of intent may serve as a basis for a future agreement, but the parties may still need to enter into separate, binding contracts before the final terms are agreed upon.
• Additionally, under Turkish Law, the principle of good faith is fundamental in assessing the binding nature of a letter of intent. If one party begins negotiations based on the letter of intent but subsequently acts in bad faith, such as by deliberately impeding the negotiation process or failing to engage in meaningful discussions, the other party may have the right to claim compensation for any damages incurred. Pursuant to Article 2 of the Turkish Code of Obligations, parties are required to act in good faith throughout the negotiation process, ensuring honesty and fairness. Therefore, even if the letter of intent itself is not legally binding, failure to observe the duty of good faith may result in legal consequences, including the obligation to indemnify the other party for any harm caused by such conduct.
A letter of intent includes the following elements:
- expression of the parties’ intentions: The parties state their intentions and goals regarding the future agreement.
- Basic terms: It may outline the main terms of the potential agreement (price, stages of the process, cooperation conditions, etc.).
- Timeline and process: The letter might specify when the agreement is expected to be finalized and the steps involved.
- Non-binding clauses: Letters of Intent often contain non-binding clauses.
As a conclusion;
• a letter of intent is not considered as a preliminary agreement and does not bind the parties;
• a letter of intent is generally not binding and is primarily used to express the parties’ intentions;
• If the letter of intent contains explicit binding terms (e.g., confidentiality obligations), those specific clauses may be binding;
• A preliminary agreement is typically legally binding and contains more detailed terms.
Accordingly, it will be necessary to carefully draft the provisions of the document titled “Letter of Intent”/ “LoI”, which the parties will sign, to determine whether the document itself and the provisions it contains will be binding, and to act within the framework of the above-mentioned principles of good faith in terms of liability.
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