We get asked about & review Letters of Intent (LoI) – here are a few thoughts…
Letters of Intent (LoI) have the benefit of enabling parties to commence work prior to the execution of the final contract, however they are usually written in summary format & this lack of detail can create contractual risk.
Does the LoI cover claims, variations, payments, disputes, termination etc in enough detail. If not, how are these things governed?
LoI’s typically have financial and time limits. What happens if these are exceeded without extension. The continuation of work by both parties could indicate that they intend to bound by a contract – but what would be the terms?
The best advice in relation to LoI’s comes from Lord Clarke:
‘The moral of the story is to agree first and to start work later.’
If this isn’t possible:
- Ensure that the formal contract is executed as soon as possible;
- Don’t exceed the financial and time limits without extension;
- Ensure that the LoI covers at least the most common contractual situations;
- Understand & manage your risk of working under the LoI;
- Keep a tacker of the status of the formal contract negotiations.