This article was published in the April 2009 Edition (No. 79) of Perimiter Systems – The UK Fencing Industry’s Premier Publication.
We have all heard of and think we know what “letters of intent” are. But is it straightforward? Strictly speaking, pure letters of intent are merely an indication of an intention to contract in the future. These, as a rule, have no binding effect and create no liability for the provider. So whilst a letter of intent can give rise to a contract, whether a contract does come into being depends on the contents of the letter and the facts of the particular circumstances. There are letters of intent that:
- do not give rise to a contract;
- do give rise to simple contract in themselves – pending execution of a formal contract;
- are a contract, to a certain extent – but are not subject to entering into a formal contract.
Why is it so important to understand the potential pitfalls? Parties have been caught out in the past with unexpected consequences. The courts have held:
- in the absence of a contract, a contractor was not liable for its breach of contract and was entitled to be paid a reasonable amount for labour and materials furnished.
- in the event of delay, a party was unable to claim liquidated (or even unliquidated) damages for the late delivery of items.
- where a contractor continued undertaking work, incurring expense beyond the £10m commitment initially confirmed in the letter of intent, it was not entitled to additional payment.
- a subcontractor was held to have no duty to complete all of the works, or execute a contract which it considered inconsistent with previous negotiations; so no breach of contract.
Why use them? Do we need to? We all know the reasons. Time is short and work needs to be commenced. In short, the parties need to get started before the contract documents have been prepared.
The problems arise from seeking to use a short document, prepared under time pressure or using a standard form of wording – which may not have been reviewed or drafted for the particular works.
Often there are conflicts in the terms, disagreement over negotiations and the formal terms of contract that the parties thought would be signed, uncertainty as to which documents take priority in the case of conflict and ambiguity, leading in turn to disputes.
My advice? The courts have held that there is no settled law on the meaning and effect of letters of intent. Each one gets reviewed on its facts. Arguably only one thing is certain, letters of intent are often not.
Unless your aim is to keep lawyers employed, my advice is to avoid their use, where at all possible.