I was recently asked whether a “letter agreement” or “letter of intent” actually constitutes a contract. The individual in question had been asked to sign a “letter of intent” by someone claiming that the letter was only a summary of deal points and not a binding contract even if signed.
To which I say, beware.
In many states, a signed “letter of agreement” or “letter of intent” is a contract, binding on everyone who signs it. The facts may change depending on the situation, but as a general rule you should never sign anything unless you are willing to be bound by it – and that means bound by what’s actually on the page – not what someone tells you or what you think it means.
Signature isn’t the only requirement for a contract, but if the letter meets the other legal tests, a court could (and many do) rule that a “letter agreement” or “letter of intent” is a contract regardless of its title, and you could be bound even if you thought otherwise.
The reason is that by law a “contract” is “an agreement which creates legally enforceable obligations.” The law is fairly flexible with regard to form and substance, and sometimes even “fills in the blanks” when a contract is ambiguous or missing important terms – yet another important reason to make sure you only sign when you agree with everything on the page and nothing has been left out. It’s also good incentive to know your rights and talk with a contract attorney before signing anything that might be interpreted as a contract. Once you’ve signed, it might be too late.