A letter of intent ("LOI") is generally regarded as a "declaration of intent" which signalises a willingness to enter into serious negotiations on the contract in question with the other partner under certain conditions. Such a declaration of intent normally gives rise to no commitment as there is no intention with regard to the legal consequences. It therefore establishes no compulsion to commence contract negotiations, nor does it constitute any necessity to conclude a contract.

Neither does the declaration of intent included in an LOI commit the declaring party even if it contains conditions for the conclusion of the contract. It can only be regarded as an expression on the part of the declaring party that it is prepared to commence contract negotiations; this constitutes no legal certainty for the recipient of the declaration, however. To this extent, an LOI is frequently only of importance from the point of view of negotiating tactics and is used to evoke or intensify the trust of the other party in the seriousness of the negotiation intentions.

The parties may nonetheless be liable under cic even with a LOI with no binding legal effect. This form of liability is only possible, however, if the sender of the letter had no serious intentions of concluding a contract from the very beginning. To this extent, the aforesaid liability corresponds with that applicable to a breach of duties to conduct contract negotiations in good faith.

Direct contractual obligations and possibly compensation claims may arise from a LOI if it constitutes duties for the preparation and implementation of the actual contract for the purchase of the company. Disclosure obligations, duties to inform, forbearance obligations ("standstill provisions") and other types of obligations may be agreed in a LOI. If the purchase of a company is involved which has an inadequate liquidity structure, a payment by the potential buyer to the seller or the company may also be agreed for a specific period in order to keep the company alive until the contract is concluded. The potential buyer may settle rent payments, personnel costs and even contractual liabilities on behalf of the seller which can then be deducted from the purchase price if a contract is concluded.

For further information please contact Dr Erich Michel, Wessing Berenberg-Gossler Zimmermann Lange, Freiherr-Vom-Stein-Strasse 24-26, Frankfurt am Maim 60323, Frankfurt, Germany- Tel: +496 997 1300, Fax: +496 997 130100.

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