Precontracts

Precontracts are agreements or instruments entered during negotiations that precede a final contract. They set out the intentions of the parties to negotiate a future contract and may define key terms, milestones, or conditions that will bind the parties once a formal agreement is executed. Common forms include letters of intent, memoranda of understanding, heads of terms, and option contracts that give one party the right to formalize a deal within a specified period.

Binding or non-binding nature depends on the language and law. Many precontracts are expressly non-binding, with a clause stating “subject to contract” or “non-binding.” Others may create binding obligations on particular aspects (confidentiality, exclusivity, exclusivity period, or the process to finalize terms) or may be enforceable as a contract if essential terms are already sufficiently defined and the parties intend to be bound.

Legal effects vary by jurisdiction. In civil law systems, there is a recognized duty to negotiate in good faith, and breaches can give rise to pre-contractual liability and damages for loss caused by the negotiating party’s bad faith or breach of promise to contract. In common law jurisdictions, enforceability hinges on express terms; there is typically no general duty to conclude a contract, though reliance damages can be claimed for misrepresentation, breach of an option, or breach of an exclusive negotiation clause.

Practical considerations include defining scope, duration, conditions precedent, confidentiality, exclusivity, and dispute resolution. Neglecting clear terms can lead to disputes about whether a binding contract exists or what conduct is legally required during negotiations.