General information only: this article is for general guidance and isn’t legal advice. If you have a specific deal in mind, get advice on your particular facts before you sign anything.
If you’re negotiating a deal (buying a business, taking on a new supplier, partnering on a project, raising investment, leasing premises), you’ll often hit the point where everyone wants to “get something in writing” before spending more time and money.
That’s usually where a letter of intent (often shortened to “LOI”) comes in.
But here’s the tricky part: many business owners treat letters of intent like a harmless, informal stepping stone - and then feel blindsided when the other party insists it’s binding, or uses it as leverage in a dispute.
So, are letters of intent legally binding in New Zealand? Sometimes yes, sometimes no - and it often depends less on what you called the document, and more on what it says and how you behaved after signing it.
What Is A Letter Of Intent (And Why Do Businesses Use Them)?
A letter of intent is a document used to record the key points of a proposed deal before the parties sign the final contract.
In plain terms, it’s often the “we’re on the same page” document that comes after initial discussions, but before the full legal agreement is negotiated and signed.
NZ businesses commonly use letters of intent when:
- you want to agree on the broad commercial terms first (price, timing, scope, responsibilities);
- you need a framework to progress due diligence or feasibility work;
- one party is about to spend money (e.g. engineering, design, legal review, site inspections) and wants some confidence the other side is serious;
- you want to lock in exclusivity for a short period while negotiations continue;
- you want to set confidentiality obligations before sharing sensitive information.
You might also hear LOIs described as:
- “heads of terms” or a Heads of Agreement;
- “term sheet” (often used in investment contexts);
- “memorandum of understanding” (MOU).
These documents aren’t always identical, but they tend to serve a similar purpose: move negotiations forward without committing to the entire final contract (yet).
Are Letters Of Intent Legally Binding In New Zealand?
A letter of intent can be legally binding in New Zealand - even if you didn’t intend it to be.
Whether an LOI is binding usually comes down to general contract principles: do the parties have an agreement that meets the requirements of a contract, and did they objectively intend to create legal relations?
A helpful way to think about it is this:
- An LOI can be entirely non-binding (a roadmap for further negotiations).
- An LOI can be partly binding (some clauses bind you now, others are “subject to contract”).
- An LOI can be fully binding (effectively the deal itself, even if you planned to “formalise it later”).
The law will look at what was written and what was done - not just the document title. If you want a refresher on the building blocks of enforceable agreements, it helps to understand what makes a contract legally binding.
Key Factors That Can Make A Letter Of Intent Binding
In practice, an LOI is more likely to be treated as binding where:
- The wording is definitive (e.g. “will” and “must” rather than “may” and “intend”).
- The essential terms are settled (e.g. price, scope, timeframes, deliverables).
- There’s clear intention to create legal relations (or at least the language suggests that objectively).
- The parties start performing as if the deal already exists (e.g. work starts, stock is ordered, services are delivered, invoices issued).
- There’s a clear dispute resolution process, governing law clause, and other “contract-like” provisions.
Even if you write “this is not binding”, that label isn’t always decisive. It can still be possible to create enforceable obligations (for example, where particular clauses are carved out as binding), and in some cases a court may look past the label if the document and the parties’ conduct show a concluded agreement.
“Subject To Contract” Is Helpful - But It’s Not Magic
Many letters of intent include wording like “subject to contract”, meaning the parties don’t intend to be bound until a final contract is signed.
This is often a good starting point, but it isn’t a guaranteed shield if the rest of the document (or your conduct) suggests you’ve already reached a concluded agreement, or if you’ve agreed to be bound on specific “standalone” terms in the meantime (like confidentiality or exclusivity).
It’s also common for businesses to mix concepts (for example, saying the deal is “subject to contract” while also stating a fixed start date, fixed price, and immediate obligations). That inconsistency can create risk.
Common “Binding” Parts Of A Letter Of Intent (Even When The Deal Isn’t Final)
Many NZ business owners use letters of intent because they want to keep the “main deal” flexible - but still lock in a few important protections while negotiations continue.
That’s where a partly binding letter of intent is often the best fit.
Here are clauses that are commonly drafted as binding straight away.
1. Confidentiality
If you’re sharing pricing, supplier terms, customer lists, forecasts, financials, or IP, you’ll usually want confidentiality obligations to apply immediately.
Sometimes this is handled in a standalone NDA, and sometimes it’s included inside the LOI. Either way, it should be clear, practical, and tailored - especially around what counts as confidential information, how it can be used, and how long confidentiality lasts.
This is where a properly drafted Confidentiality Clause can save you a lot of headaches later.
2. Exclusivity / No-Shop
Exclusivity (sometimes called a “no-shop” clause) means one party agrees not to negotiate with other potential deal partners for a set period.
For example:
- a buyer wants exclusivity while they complete due diligence on a business purchase;
- a supplier wants exclusivity while they invest time quoting and planning;
- a potential investor wants exclusivity while they work through terms and approvals.
Exclusivity can be commercially reasonable - but it can also be a trap if it’s too long, too broad, or includes penalties you didn’t anticipate. If you agree to exclusivity, make sure the timeline is realistic and tied to specific milestones.
3. Cost Allocation
LOIs often set expectations on who pays for what while negotiations are ongoing, such as:
- legal fees (each party pays their own, or one party contributes);
- due diligence costs;
- valuation reports;
- technical or engineering assessments.
This is particularly important where one party is doing most of the upfront work and wants certainty they won’t be left carrying all the costs if the other side walks away.
4. “Good Faith” Negotiation Obligations
Some letters of intent say the parties will negotiate in “good faith”. That can sound fair and collaborative - but it can be vague, and it can create uncertainty about what behaviour is required.
In New Zealand, “good faith” wording may be enforceable in some contexts, but courts can be cautious about enforcing an open-ended obligation to negotiate (especially if it’s unclear what the parties must ultimately agree on). If you’re including a good faith obligation, it’s worth being clear about what it means in your context (for example, timeframes for responses, providing information, attending meetings, and not undermining negotiations).
5. Termination And Walk-Away Rights
A practical LOI usually explains how negotiations end, including when either party can walk away and what obligations continue after termination (for example, confidentiality, return/destruction of information, cost responsibility).
This is also where it helps to understand general principles around Terminating A Contract, because poorly drafted exit wording can lead to disputes about whether you were “allowed” to stop negotiations.
How To Tell If Your Letter Of Intent Is “Safe” (Or Risky)
If your goal is a non-binding document that simply records intentions, you’ll want to pressure-test your letter of intent before you sign it.
Here are common signs an LOI may be riskier than you think.
It Includes All The Essential Deal Terms
If the LOI covers the core commercial terms in a complete way (price, deliverables, timelines, payment terms, key responsibilities), it may look like a finished contract - even if you planned to replace it with something “more formal” later.
If you’re not ready to be bound, consider whether some of those terms should be clearly labelled as “indicative” or “for discussion only”, and whether key points should be left open pending due diligence and final approval.
It Uses “Contract Language” Throughout
Phrases like “the parties agree”, “must”, “will”, “breach”, “default”, and “damages” can make the document read like a final agreement.
That’s not necessarily bad - but if you intended the LOI to be non-binding, that style can undermine your position later.
You Start Acting Like The Deal Is Done
This is a big one for small businesses.
Imagine you sign a letter of intent for a supply arrangement, then you:
- start ordering stock;
- start delivering services;
- start onboarding staff;
- announce the partnership publicly.
Even if the LOI says “non-binding”, your conduct might suggest the opposite - and disputes often arise when the relationship deteriorates before the final contract is signed.
The Document Is Internally Inconsistent
It’s surprisingly common to see LOIs that say “not legally binding” at the top, then include clauses later that look binding (fixed commencement date, detailed obligations, strict termination penalties).
Those contradictions are where arguments start.
How To Draft A Letter Of Intent That Matches What You Actually Want
The best letter of intent is one that reflects the real commercial intention of both parties - and makes it hard for anyone to “reinterpret” later.
Here are practical strategies NZ businesses use to get this right.
Be Clear: Non-Binding, Partly Binding, Or Binding?
Start by deciding what you want the letter of intent to be:
- Non-binding: You want a negotiation roadmap only.
- Partly binding: You want confidentiality/exclusivity/costs binding, but not the full deal.
- Binding: You want the LOI to function as the agreement (often used where time is critical, and the parties accept some risk).
If it’s partly binding, it’s usually best practice to:
- include a clear statement that the main transaction terms are “subject to contract”; and
- specifically list the clauses that are intended to be legally binding (e.g. confidentiality, exclusivity, costs, governing law).
Use The Right Document Type For The Job
Sometimes a letter of intent is the right tool. Sometimes it isn’t.
For example:
- If you’re still very early-stage and only want to capture broad intentions, an LOI or MOU may be appropriate.
- If you’ve agreed the terms and want enforceability, you may be better off moving straight to a proper contract (or at least an interim agreement).
- If you need extra certainty and formality (for example, around serious commitments), you may need to consider whether a deed is more appropriate - and it helps to understand the difference between a deed and an agreement.
The key is not to default to a letter of intent just because it sounds simpler. The “simple” option can be expensive if it creates confusion later.
Make Due Diligence And Approvals Explicit
Many business deals depend on things like:
- finance approval;
- board/shareholder approval;
- landlord consent;
- regulatory approvals;
- satisfactory due diligence (financial, legal, operational).
If that’s true for your deal, say so plainly in the LOI. Otherwise, you risk being accused of “backing out” when you’re really just discovering an issue that would have stopped you from proceeding in the first place.
Be Careful With Statements That Could Amount To Misrepresentation
Letters of intent are often written quickly, and people sometimes make confident statements to keep momentum going (for example, revenue numbers, future work pipelines, supplier capabilities, ownership of IP).
If those statements are wrong, you may create legal exposure. In business negotiations, Misrepresentation issues can arise when one party relied on inaccurate statements and suffered loss as a result.
A good LOI will often:
- limit what representations are being made at that stage (if any);
- state that the final deal is subject to due diligence; and
- require important claims to be verified before contract signing.
Don’t Sign Until You’re Comfortable Living With The Consequences
This might sound obvious - but it’s where many small business owners get caught. A letter of intent can feel “informal”, so it’s tempting to sign quickly to keep the other party happy.
Before you sign, ask yourself:
- If the other party treated this as binding tomorrow, could I live with that?
- Am I giving away exclusivity that could slow my growth or stop me exploring better options?
- Am I committing to timeframes or pricing that I haven’t properly costed?
- If negotiations fail, what obligations survive (confidentiality, costs, return of information)?
Getting a lawyer to review an LOI is usually far cheaper than fixing a dispute later. If you’re negotiating something important, it’s worth having someone sanity-check the risk points - this is the exact reason many businesses decide a lawyer should review your contract before it’s signed.
Key Takeaways
- A letter of intent is commonly used to record key deal terms and move negotiations forward, but it can still create legal obligations.
- In New Zealand, a letter of intent can be non-binding, partly binding, or fully binding depending on its wording, certainty of terms, and the parties’ conduct.
- Clauses like confidentiality, exclusivity, cost allocation, and termination are often drafted to be binding even where the main deal remains “subject to contract”.
- Letters of intent become risky when they read like a final contract, include all essential terms, or when the parties start performing before the final agreement is signed.
- If you want an LOI to be non-binding (or only partly binding), you should make that explicit and consistent throughout the document.
- Because LOIs are often signed early and quickly, it’s important to manage legal risks like unclear obligations and potential misrepresentation before you commit.
If you’d like help drafting or reviewing a letter of intent (or working out whether you should use an LOI, a Heads of Agreement, or a full contract), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
