Is an LOI legally binding? The general rule: look to the language of the LOI to determine if the parties intend to be bound to all or some portions of the LOI. Most litigation regarding the enforceability of LOIs arises because the parties did not clearly reflect their intention concerning enforceability. This is particularly so if the LOI contains the material provisions of a contemplated transaction and there is no unequivocal expression of the intent of the parties to the contrary.
Yet in the hotel management agreement context, the LOI is useful and worth the effort, time and risk precisely because it is a way to conclude the negotiation of the material terms of the agreement prior to launching into the tedious and often protracted negotiation – mainly between lawyers – of the text of the definitive agreements. In the international context, the "management agreement" can consist of five or more separate agreements. It is almost always more efficient to ascertain if there is a meeting of the minds on the material ("key") business terms first.
Notwithstanding a finding that a LOI does not constitute a contract, courts may impose a "good faith duty of negotiation". These states are California, New York, Illinois, Maryland and Massachusetts. In other jurisdictions, no such right is recognized and is expressly excluded. They are Tennessee, Kentucky, Texas and Washington.