Letters of Intent – The sting in the tail

Published: 21st August 2008

Letters of intent come in many guises. You might know them as heads of terms or memoranda of understanding and they are often used to plug the gap in commercial transactions while the final agreement is being completed. Unfortunately, they carry considerable risk.

The danger is that if work on a project starts once the letter of intent is signed the parties inclination will be to work on the project, and not on the "proper" agreement.

The terms of the letter should set out which bits of it are legally binding. Even where the whole thing is expressed to be non-binding, they can create a strong moral commitment. People often feel that including the magic words "subject to contract" will protect them like garlic repels vampires. However, if the parties proceed to observe the actions required under the proposal they will, by their conduct, be taken to have entered into a binding contract on the terms set out in the proposal document. This isn't good for anyone, as common law will imply terms into the contract that will establish a position that may be less than ideal.

Points to consider:

• Identify which bits will be binding.
• Set the duration, and stick to it. Any amendments or extensions need to be recorded in writing. This really does matter - in Brunel University v. ERDC the court held that the rates and prices for works under the letter of intent applied to the entire construction contract. Ouch.
• Put a limit on the costs that will be incurred. Does there need to be an indemnity to cover the value of works undertaken in the interim period?
• Define properly the scope of works / the specification for what's going to happen while the letter is in force.
• Do you want to include a lock-out (exclusivity) provision?
• TUPE - don't forget, a letter of intent can trigger the transfer of staff.
• Disengage. The termination of sections of the letter of intent needs to be matched to the commencement of corresponding terms in the full agreement.