cooperation.law

Acting together binds us.

Letter of intent

The question

What does a letter of intent bind, if it only declares an intention?

In brief

A letter of intent (Absichtserklärung) records that the parties want to negotiate and on what. As a rule it does not create the contract they are aiming for. What does bind are the clauses the parties expressly agree to be binding and, independently of these, the statutory duties arising from negotiations. Anyone who uses a letter of intent to create trust and then disappoints it without good reason may be liable.

The law

Intention, not contract

Letter of intent, memorandum of understanding, term sheet and heads of terms are not statutory concepts. Their effect depends on their content and is determined by interpretation (Sections 133, 157 German Civil Code (BGB)). The key question is whether the parties intended to be legally bound and, if so, to what.

For the main contract that intention is usually missing. The statute offers a rule of interpretation: as long as the parties have not agreed on all points on which, according to the declaration of even one party, agreement is to be reached, the contract is, in case of doubt, not concluded. Agreement on individual points is not binding even if it has been recorded (Section 154(1) BGB).

A letter of intent should be distinguished from a preliminary contract (Vorvertrag), which obliges the parties to conclude the main contract and therefore requires its content to be sufficiently certain. Where the main contract requires a particular form, such as notarisation, the preliminary contract generally does too. A letter of intent should state clearly that it is not a preliminary contract.

Labelling a document “non-binding” does not always help. If a paper fully settles performance and counter-performance and the parties start implementing it, a contract may already exist.

What can be expressly binding

Alongside the non-binding intentions, letters of intent often contain clauses meant to apply immediately:

  • Confidentiality: protection of information exchanged in the negotiations. Trade secrets are protected only where reasonable secrecy measures are taken (Section 2 no. 1(b) Trade Secrets Act (GeschGehG)); a confidentiality agreement is one such measure.
  • Exclusivity: an undertaking not to negotiate with third parties for a certain period.
  • Costs: usually the rule that each party bears its own costs. Lump-sum payments in case the deal fails can create pressure that conflicts with the freedom not to contract and, for transactions requiring a form, such as the purchase of land or of GmbH shares, may themselves require that form (OLG München, judgment of 19 September 2012 – 7 U 736/12).
  • Choice of law and jurisdiction: which law governs the letter and the negotiations and who decides disputes, see Across borders.

Which clauses bind should be stated expressly, ideally by listing their numbers. Where competitors negotiate, the limits of competition law on exchanging information apply from the outset, see Competition and cooperation.

Liability for breaking off negotiations

As soon as the parties enter into negotiations, an obligation arises in which each must have regard to the other’s interests (Sections 311(2) no. 1, 241(2) BGB). Breach of this duty gives rise to damages (Section 280(1) BGB).

The freedom not to conclude a contract remains. Breaking off negotiations is not in itself a breach. According to case law, liability generally arises only where a party breaks off without good reason after having created trust that the contract would certainly be concluded (BGH, judgment of 7 February 1980 – III ZR 23/78, BGHZ 76, 343). What must then be compensated is the reliance loss, mainly expenses incurred in reliance on the contract, not the profit from the contract that never came about.

For contracts requiring a particular form, such as contracts for the sale of land (Section 311b(1) BGB), the threshold is higher. Not every unjustified break-off suffices. What is required is a particularly serious, usually intentional breach of the duty of loyalty, such as a party merely pretending to be willing to conclude (BGH, judgment of 9 November 2012 – V ZR 182/11, NJW 2013, 928).

A letter of intent can create exactly the trust that matters here. It therefore often states that each party may end negotiations at any time. That reduces the risk of liability but cannot exclude liability for intentional conduct (Section 276(3) BGB).

Outline

The following outline is illustrative. It shows one possible structure and is no substitute for drafting in the individual case.

  1. Parties
  2. Preamble: occasion, aim and state of discussions.
  3. Subject of negotiations: what is being negotiated, with the main points.
  4. Principles of cooperation: “The parties shall negotiate in good faith and provide each other without delay with the information required for the negotiations.”
  5. Timetable: steps and target date for signing.
  6. No obligation to contract: “This letter of intent creates no obligation to conclude a contract. It is not a preliminary contract. Either party may end the negotiations at any time. Only clauses 7 to 11 are legally binding.”
  7. Confidentiality (binding)
  8. Exclusivity (binding, if wanted)
  9. Costs (binding)
  10. Term: the binding clauses apply until the main contract is signed or negotiations end; confidentiality continues for a set period (binding).
  11. Choice of law, jurisdiction or dispute resolution (binding)
  12. Final provisions: form of amendments, signatures.

Online

Letters of intent are now often negotiated and signed online: by email, as a PDF or with an electronic signature. That is sufficient, since the law prescribes no form for them. Individual binding clauses may require a form, however, such as an arbitration agreement involving a consumer (Section 1031(5) Code of Civil Procedure (ZPO)).

The trust that matters for liability for breaking off negotiations arises in video calls just as it does on site. Assurances such as “Let’s do it that way” carry no less weight in a video call or chat than at the negotiating table. Anyone not yet willing to commit should say so clearly online too.

Where documents are shared in an online data room, access rights, logging and download rules are among the secrecy measures the Trade Secrets Act presupposes.

Relevant phases

Limits of this overview

This page describes German law. In common law systems letters of intent are in part assessed differently, for instance as regards a duty to negotiate in good faith.

As at 30 September 2026