Letters of Intent vis-à-vis Offer Letters

Introduction

Imagine securing a job offer from a reputed IT sector MNC through your college’s campus recruitment. Being a pre-placement offer, you have ample time before your joining. After completing the on-campus formalities, you receive an offer via email. However, upon completing your course, the HR team informs you that your joining has been delayed due to onboarding issues.

In such a scenario, it’s natural to feel disheartened and question how the company can legally refuse your joining after issuing and accepting an offer letter. The answer lies in the fact that the document received was likely not an offer letter but a “Letter of Intent” (LOI).

General Concept

In the realm of corporate and business law, understanding the distinctions between a Letter of Intent (LOI) and an Offer Letter is crucial for both employers and employees. These documents serve different purposes and carry varying legal implications, significantly impacting business transactions and employment agreements. A Letter of Intent (LOI) merely communicates an employer's intention to potentially extend an employment offer. A common misconception is that an LOI, once accepted, becomes a legally binding agreement. In response to onboarding concerns, Capgemini recently clarified that its hiring process depends on staffing needs and that candidates selected on-campus were issued LOIs, which were not employment offers.

In the case of South Eastern Coalfields Ltd. & Ors. vs. S. Kumar's Associates AKM (JV)¹, a Division Bench of the Hon'ble Supreme Court ruled that an LOI signifies an intention to enter into a contract but does not establish a binding relationship unless explicitly stated otherwise.

This precedent underscores the importance of drafting LOIs carefully to avoid misunderstandings and reduce potential disputes.

Why Is an LOI Needed?

Employment contracts often involve extensive negotiations between employers and candidates before a final offer is extended. Employers are generally reluctant to modify employment terms once an offer letter has been issued, leaving candidates in a dilemma when faced with non-negotiable terms.

In such cases, issuing LOIs before offer letters helps minimize disagreements and facilitates better negotiations for both parties. LOIs also provide a non-binding framework, giving both parties flexibility during the initial stages of the hiring process.

Five Key Points for Drafting an LOI

1. Explicit Clarity: Clearly state that the document is an LOI and not an offer of employment.
2. Time Frame for Offer: Specify a timeline within which an offer letter may be issued. If no offer is extended within this period, the LOI should automatically expire.
3. Non-binding Nature: Ensure that the LOI does not restrict the candidate from seeking or accepting employment elsewhere.
4. Separation from Offer Letter: Maintain distinct content and structure for LOIs and offer letters. The LOI may provide basic information about the potential job role and an approximate Cost to Company (CTC). In contrast, the offer letter should detail precise CTC, job description, benefits, start date, and employment terms.
5. Avoiding Contractual Obligations: Use language that explicitly avoids creating any contractual obligations or implying an employer-employee relationship.

Concluding Remarks

LOIs are not limited to employment contracts; they are also commonly used in business transactions such as mergers, acquisitions, and joint ventures to outline preliminary terms before formal agreements.

Understanding the distinctions between an offer letter and an LOI is vital for ensuring clarity and minimizing legal risks. Both documents serve distinct purposes: offer letters formalize employment agreements, while LOIs express an intent to negotiate or proceed further. Grasping these nuances helps parties navigate their legal obligations effectively.

Ref - ¹AIR 2021 SC 3540

February 3, 2025