For something designed to solve a simple problem – how to get initial momentum into a project – letters of intent cause a disproportionate amount of problems.
It’s a common problem: how to get a proposed relationship with a customer or provider off the ground? It should be easy to put down terms or outline scope in writing for use as a platform for the discussions necessary to formalise a future contract.
But problems arise when parties agree initial terms without stopping to think about the consequences of what they’re signing.
By their very nature, letters of intent tend to be looser and more ill-defined than ‘proper’ contracts. That informality creates most of the potential problems. It’s fine if a letter of intent is intended to be non-binding and is clearly written in that way.
But, as the saying goes, “you can’t be half pregnant”: a document is either binding or it’s not and trouble usually follows where companies sign something without taking the time to agree whether it’s binding. Even worse, they cling blindly to the hope that there may be some halfway house that will show some level of commitment while still leaving room to change minds later. Sorry, folks, there isn’t!
There have been a number of cases where the courts have been asked to rule on whether a letter of intent is or isn’t binding.
Generally, the issue comes down to the degree of certainty which the parties used in their language. It pays to take care. If you don’t want a document to be binding, use language that shows that matters are still to be agreed and expressly state which provisions are legally enforceable and which aren’t.
The trickiest type of letter of intent is one intended as an instruction to proceed. Quite often, the parties really just want to describe the first stage of a transaction which will allow a potential service provider to do some initial scoping work (on a limited, capped budget), but without committing to the full project. It all comes down to the negotiating leverage of the parties as to how much commitment is initially required.
Mostly, this can be dealt with fairly. But not always. I have seen a recent example of a large UK telecom provider insisting that a small customer (who only wanted to authorise some initial scoping work) had to sign the entire long-term services agreement instead, with the only concession to the early-stage nature of the discussions being that the provider would agree to consider making changes to its standard agreement as part of the negotiation process – but no commitment to do so.