Preliminaries | In Principle

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Once a decision has been taken to conclude a specific transaction, the parties will often sign a letter of intent. This is a form of expression of the intention of entering into a contract in the future. The actual contract will be concluded only following negotiations.

A letter of intent (also referred to as a “letter of understanding,” “protocol,” “heads of agreement” or “memorandum of understanding”) is not a concept specifically defined in Polish law, but is widely used in current market practice.

The parties sign a letter of intent in order to establish procedures for going forward with the transaction, scheduling, the goals they seek to achieve, and the conditions for negotiations toward signing of the operative agreement and any related agreements. The letter of intent will often include provisions concerning conduct of legal, tax and financial due diligence of the target prior to conclusion of the operative agreement, as well as provisions addressing situations in which negotiations are broken off. It may also address confidentiality issues, or these may be governed by a separate non-disclosure agreement.

The letter of intent should expressly provide that it does not impose any obligations on the parties to conclude the final agreement (but may contain other obligations, such as an obligation to maintain confidentiality, or exclusivity of negotiations), and eventual conclusion of the agreement between the parties will require negotiation of all material aspects of the deal. The letter of intent may also include binding provisions with respect to choice of law, the manner of dispute resolution, and the controlling language version of documents. The legal effect of signing a letter of intent in this form is limited to liability for the party’s out-of-pocket costs in the case of bad-faith negotiations (culpa in contrahendo).

At the preliminary stage, the parties will also typically decide whether it is necessary to enter into a framework agreement. In transactions with a complicated structure, a framework agreement will identify and organise the actions that must be undertaken as part of the transaction in order to achieve the purposes of the parties and compliance with legal requirements. It thus serves as a roadmap for the transaction.