A letter of intent can be a useful device to plug the gap during commercial negotiations pending agreement of a final contract. However, for those involved in the legal process, the letter of intent has the potential to create more problems than it solves. The danger is that if work on, say, a project starts once a letter of intent is signed, the parties may shift their focus to the work being carried out rather than the potentially difficult contractual issues that have yet to be agreed. 

A letter of intent may be used to cover costs incurred before entering into the main contract; to cover interim services pending negotiation of the final contract; to provide an outline of the parties’ intentions to give them a structured basis for negotiating the main contract; to provide some kind of exclusivity of negotiation. or to prevent the prospective buyer of the target disclosing information during negotiations.Whether the heads of terms are legally binding will depend on the individual circumstances.

The terms of the letter should be clear as to whether all or just parts of the letter are binding. Even where they are not legally binding, they can create a strong moral commitment, and so should be considered with caution.

If you would like to find out more about how to use letters of intent, heads of agreement or other preliminary agreements at a great venue and an incredible price, we recommend attending Anassutzi & Co Drafting Commercial Contracts seminar which promises to give business owners, directors and commercial managers all the necessary tips and hints to conclude efficiently contracts including letters of intent and heads of agreement plus lots of checklists and other materials.

Letters of intent can be very useful in certain circumstances but can create legally binding obligations and of course expose the parties to it to a variety of issues. For example, the parties should specify which terms are intended to be legally binding. Although it is generally accepted that agreements to agree are not binding an obligation to negotiate in good faith where an agreement is not subject to contract can be binding and the parties will be required to negotiate in good faith. There may be a specific time period over which the letter of intent applies. Any extensions of the letter should be carefully documented and care should be taken to ensure that the parties do not continue to trade after expiry of the letter of intent and without a written contract. If the letter of intent is to cover interim services, then a supplier should consider including limits on its liability in respect of the services being provided. It may be worth attaching standard terms and conditions to the letter where these may be appropriate, including costs. The interaction of the letter of intent with any subsequent contract should be looked at carefully. Should the current letter supersede all previous correspondence and negotiation? Should the subsequent main contract supersede the letter of intent?

The above are just some of the issues that a party considering entering into a letter of intent should be aware of and if doing so without taking first legal advice it must know the legal consequences of its action. The easiest, most cost effective way to do so is by attending Anassutzi & Co Drafting Commercial Contract seminar. It is addressed to business owners, commercial managers, directors and non- legal specialists and promises to empower the decision makers with the necessary skills and knowledge to enable them to conclude contracts better, more efficiently and quicker.