LETTERS OF INTENT
LEGALLY PARKED
Ultimately, it is important to use
letters of intent with extreme caution. Otherwise, you could find yourself bound into a contract
usually aren’t a contract in themselves. Heads of agreement look like letters of intent, but it is generally made clear that a formal contract must follow. Without certainty, there is no legally binding contract – something that can often work in the favour of the parties. Letters of intent, by contrast, can be legally binding contracts. Ultimately it depends upon the content and wording. So why would this be an issue? Well, in a nutshell, a contract that doesn’t reflect the true intention of the parties can be created.
The general aim of such a letter is to detail the agreement reached by the parties so it can cover matters such as the services to be provided and the associated costs. Parties often include both the start and end date of the contract, and how the contract can be terminated.
A question of words
All in all, a letter of intent can cover a wide range of different subject matters, depending on the particular circumstances. A letter of intent might also be a letter of comfort or take the form of a heads of agreement. There are key legal differences between the three forms of document. Letters of comfort are generally not legal contracts. Exactly as the name suggests, they are intended to give a party comfort that a contract will be entered into. They
into a formal contract, so that the letter is effectively a heads of agreement and not a contract.
6. Impose time limits
State the date by which the formal contract must be agreed and only allow this to be extended in writing, signed by both parties.
7. Don’t forget confidentiality issues Even though in letter form, think about confidential information. It is important to protect such information with specific confidentiality provisions.
8. Include conditions precedent A condition precedent refers to something
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that must happen before the contract comes into effect. This could be that the parties are not bound until a formal contract is signed by both parties. Again, this avoids the suggestion of a legally binding contract.
9. Attach a sample contract This could show that the letter by itself is not a valid contract. It can also be used to show what the parties intended to include in the contract, if there is a dispute at a later date.
10. Include termination provisions State how each party can bring the letter to an end. Combined with time limits, this can prevent a letter of intent from becoming a legally binding contract.
Paying over the odds In our case study, the client specified some of the services to be provided at a very high level: monitoring the premises via CCTV; parking attendants on site; and management of ticketing machines. However, the client also wanted cost management and ideas on how to maximise revenue and profit, but had neglected to say so.
The letter of intent, though, contained all the legal requirements to make it a valid contract. This included a price for provision of the services.
That proved to be crucial. When the client tried to finalise the formal contract, a dispute arose over what the price included. The wording in the letter of intent was specific. Services were defined and a price given for those services. However, additional managerial matters such as cost management had been left out, so the contractor could successfully argue that he was due extra payment for the omitted services. He said that he priced the job simply for the specified services and not for anything else.
As the letter could be viewed as a contract in itself, the client could be bound by the wording and found that he was paying significantly more than he had expected to. From the contractor’s viewpoint, the position is equally risky. If the services are generic, for example, could he find himself having to provide services he hasn’t actually charged for? Could the client force him to comply with the letter because it is a legally binding contract? Ultimately, it is important to use letters of intent with extreme caution. Otherwise, you could find yourself bound into a contract – with no easy means of getting out.
AUGUST 2012 21
Aaron Amat /
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