Letter of intent for an Australian deal and what each clause does

You have agreed the shape of a deal on a handshake, or the other side has emailed you a short document titled "letter of intent" or "heads of agreement" and wants your signature. Before you put pen to paper, it is worth knowing what that document actually does. It is not the contract you are ultimately aiming for, but it is far more than a polite note. Depending on how it is drafted, a letter of intent can lock you into binding obligations, freeze a negotiating window, and silently hand the other side access to your confidential information.

A letter of intent is a preliminary document used at the start of a transaction, typically a business or share sale, a property purchase, or a significant supply or construction engagement. Its job is to record the main commercial terms you have discussed and to set the framework for the negotiations and due diligence that follow. It does not replace the final contract, but it binds the parties to the extent the letter itself says it does. The whole skill of drafting one lies in drawing that line precisely: stating clearly which provisions are binding today and which are no more than an expression of intent.

The statement of what binds and what does not

The single most important clause in any letter of intent is the one that says how much of the document is legally binding. A letter is usually drafted so that most of its content is non-binding, with only a handful of specific obligations intended to take effect immediately. If that distinction is not drawn clearly, a court may read the whole document as a binding contract, or may treat one stray sentence as an enforceable promise you never meant to make.

Australian courts decide whether a document creates a binding contract by asking whether the parties actually intended to be bound, and the classic authority is the High Court's decision in Masters v Cameron (1954) 91 CLR 353. That case identified tensions between reaching agreement and keeping it subject to a formal document, and the categories it set out remain the way courts approach the question:

Immediately binding: the parties have reached final agreement on all the essential terms and intend to be bound at once, even though they plan to restate the deal in a more formal document later.
Binding on a condition: the parties intend to be bound at once but only on the condition that a formal contract is later executed; until that happens there is no binding deal.
No intention to be bound: the parties do not intend to become legally bound at all until a formal contract is signed.

The best protection is an explicit clause that says which parts of the letter are binding and which are not. A typical drafting choice is a provision stating that paragraphs (confidentiality, exclusivity, costs, governing law) are binding, and that everything else is expressed as intent only and creates no obligation. That clause is what you point to if a dispute later breaks out over whether a deal was struck.

Who the parties are and what the transaction is

A letter of intent should name the parties precisely, using their full legal names rather than trading names, and should describe the proposed transaction in one or two sentences. At this stage the description can be a summary, but it needs to be accurate enough that no one can later claim the letter was about something different.

The trap here is a sale structured with the wrong entity. If the letter names one company as the buyer but the real purchaser is a related entity that has not signed at all, the binding obligations in the letter arguably attach only to the company that signed. When a transaction will be carried out by a special purpose vehicle that does not exist yet, or by a family trust, identify that entity and have the correct parties sign. This matters most for the binding provisions, because the whole point of the letter is to create enforceable obligations against someone specific.

The key commercial terms

The letter should record the commercial heart of the deal in enough detail to guide the drafting of the final contract, without descending into a full contract. For a sale this usually means the price or pricing formula, what is being bought or sold, the assets or shares involved, and the headline condition or due diligence steps that need to happen before completion.

These are normally among the non-binding provisions, because they are the very things still being negotiated. But treating them as non-binding is not the same as leaving them vague. The letter is the yardstick that the final contract is measured against, and the more clearly the commercial terms are recorded now, the harder it is for either side to quietly change them later or to claim a misunderstanding.

Confidentiality

Deal negotiations routinely involve handing over commercially sensitive material: financial statements, customer lists, pricing models, and trade information. If that material flows before a final contract is signed, you want a confidentiality clause that is binding from the moment the letter is signed.

The clause should define what information it covers, who is allowed to see it, what they may use it for (typically only evaluating the proposed transaction), and how long the obligation lasts. Two points tend to cause trouble:

Who is covered: the obligation should extend to the other party's employees, advisers, and any agents involved, so that information is protected even when it is passed to a third party such as an accountant or a lawyer.
What counts as confidential: if the definition is too wide it becomes unworkable, and if it is too narrow the material you most want to protect falls outside it. Money already spent on legal advice to negotiate confidentiality and exclusivity is often the best value in the whole transaction.

Exclusivity and the lock-out

An exclusivity clause, sometimes called a lock-out or a "no-shop" provision, prevents the seller from negotiating with anyone else while your deal is being progressed. If you are a buyer spending weeks on due diligence, you do not want to discover at the end that the seller ran a parallel process with your competitor. The clause obliges the seller, for a defined period and subject to agreed carve-outs, not to solicit or accept competing offers.

Exclusivity is a genuinely binding obligation and is often the clause that gives a buyer the confidence to spend money on investigations. But the drafting needs care:

Duration: set a realistic exclusivity period, with the ability to extend. An open-ended lock-out can be challenged as too uncertain, while one that expires too early gives the seller no reason to focus on you.
Carve-outs: sellers will push for exceptions so they can respond to unsolicited approaches or to particular named bidders, and a breach is usually dealt with by talking to the other party rather than by suing.
Enforcement: because damages can be hard to prove where a seller simply talks to someone else, a buyer may want a mechanism for stopping the seller from dealing with others, such as an agreed course if the seller receives a competing approach.

While binding, an exclusivity clause only stops the seller from dealing with others. It does not force the seller to sell to you, and it does not oblige either party to reach a final agreement. Those remain matters for the future.

Due diligence and access

If the deal depends on one party investigating the other, the letter should record the scope of that process and the arrangement for providing access to records, premises, and personnel. It signals that the buyer will need to review certain documents and that the seller will make them available within a defined period.

This clause is closely bound up with confidentiality, because the information released during due diligence will only be shared on the strength of the confidentiality obligations. It is worth being realistic about how long due diligence will take and what happens if the seller cannot provide access when needed, since a delay here can quietly push an exclusivity window past its expiry.

Who pays the costs

A costs clause states that each party bears its own legal, accounting, and other costs of the transaction, unless the deal completes and a different arrangement is agreed in the final contract. This provision seems minor but it prevents an unpleasant surprise, because a failed transaction can otherwise leave one party arguing about who should pay for work done in anticipation of a deal that never closed.

Sellers in particular should make sure this clause is on the page. Because a buyer may incur substantial due diligence costs that produce no result if the deal falls over, parties generally agree that each bears its own costs, and that whatever is spent during negotiations is spent at each party's own risk. That allocation should be explicit rather than assumed.

Expiry and termination

A letter of intent should say when it ceases to have effect. The common approach is a fixed expiry date, so that the exclusivity period, the confidentiality obligations, and the whole document lapse on a stated day unless it is extended or a formal contract is signed before then.

The expiry date deserves real thought rather than being a default number. If it is too short, negotiations may be cut off mid-stream and an exclusivity period can expire while you are still doing due diligence. If it is unreasonably long, the other side will resist. A sensible letter also allows for termination by either party on notice, so neither side is trapped in a process that is going nowhere.

Governing law and the path to a formal agreement

Most Australian business letters of intent will name a jurisdiction, usually an Australian state, whose law governs the interpretation of the binding provisions. It is a short clause but it matters if the parties are in different states or if there is any cross-border element, because it fixes which court's approach a dispute would follow.

The letter should also state expressly that it is the intention of the parties to negotiate and execute a formal agreement and that, apart from the identified binding provisions, the letter does not create contractual relations. Words such as "subject to contract" or "subject to formal agreement" reinforce that the deal is not yet final. It is worth knowing, however, that an agreement merely to negotiate is generally not enforceable by a court, because the obligation is too uncertain to give effect to, and that an attempt to oblige parties to keep negotiating in good faith will not, on its own, force a reluctant party to complete a deal.

Other clauses that situationally belong

Not every letter of intent needs every clause, but a number of additional provisions come up depending on the deal:

Break fee: an agreed payment one party makes to the other if the deal fails for a stated reason, such as the seller accepting a competing bid; useful to compensate a buyer for a wasted exclusivity period.
Standstill: a prohibition on one party buying shares in the other during negotiations, relevant in a listed-company or public deal.
Conditions precedent: the set of steps or approvals that must be satisfied before completion, such as finance, board approvals, or regulatory clearances.
Dispute resolution before signing: a clause providing for a short negotiation period or a stated escalation if disagreement arises about the letter itself.
Binding heads for certain terms: in some deals the parties choose to make a subset of the commercial terms binding (such as price and timing) even though the rest remain subject to a formal contract, so that the headline of the deal cannot be reopened.

Where an Artificer Legal lawyer helps before you sign

A letter of intent sits at a strange point in a deal because it must be strong enough to protect you but loose enough that it does not accidentally become the binding contract you are not ready for. That balance is exactly what a practitioner from Artificer Legal would review before you sign.

When we review a letter of intent, we start with the binding and non-binding distinction, because it decides what you are actually committing to today, and we check that confidentiality, exclusivity, costs, and governing law sit on the binding side while the commercial terms remain expressed as intent. We would push back on an exclusivity period that is vague or open-ended, on a confidentiality definition that fails to cover the information you most care about, and on a document that was handed to you described as "just a formality" when it in fact contains enforceable lock-out and break-fee obligations. We also check that the right entity is named, and that the letter sets a workable expiry date aligned with your due diligence timetable. In negotiation we generally insist on the binding-versus-non-binding statement being made expressly and early, and we confirm that the parties and the transaction are identified precisely, before turning to the detail of the exclusivity and confidentiality provisions.

The binding and non-binding distinction

If there is one part of a letter of intent that separates a document that protects you from one that causes a dispute, it is the statement of what is binding and what is not. A letter that never makes that distinction is an invitation for a court to decide it for you on the principles in Masters v Cameron, and a court's answer may not be the one you intended. The parties who run into trouble are rarely those who set out to be sneaky; they are those who signed a friendly two-page letter without realising that its language had already committed them to terms they thought they were still negotiating.

Keep the letter short, make the binding provisions an explicit and separate list, and never sign one without knowing exactly which sentence could be enforced against you. That small discipline, applied at the start of a deal, is what lets a letter of intent do its real job: protecting the conversation while it stays open, and protecting you if the deal never happens.

In short, a letter of intent records the agreed headline terms of a transaction, binds you only to the specific obligations it clearly marks as binding such as confidentiality, exclusivity, costs, and governing law, and leaves the rest as intent until a formal contract is signed. Draft the binding and non-binding distinction precisely, name the right parties, set a workable exclusivity period and expiry date, and get advice before signing so the document protects rather than traps you.