Letter of intent

Letters of intent are a way of expressing an intention to enter into a contract at a future date, usually on terms which have yet to be further negotiated and agreed.  Such communications are usually not intended to be legally binding.  They are often used where someone wants work carried out before the formal contract is entered into. However, the legal effect of a letter of intent depends on its context, and the conduct of the parties, so they must be used with great care. If you’re not careful you may find you’ve actually entered into a contract.

When are letters of intent actually contracts and legally binding?

It will be more likely that a letter of intent will be considered to be a contract where:

1. The main terms to the proposed contract are agreed, such as the price and the specific work or services to be performed.
2. Consideration has been provided by each party, i.e. each party has benefited from the contract.
3. There is no express intention that the agreement is intended to be temporary, or “Subject to Contract”.

There are however no hard and fast rules, and courts are likely to consider all of the facts.

Services supplied under letters of intent

If you need someone to commence work urgently before formal terms are agreed, to reduce and restrict the scope of any potential dispute, it’s good practice for any letter of intent to restrict or limit each party’s liability. Ensure your letter of intent:

1. Provides an upper payment limit.
2. Sets out who is authorised to request services to be performed.
3. Specifies the applicable law.
4. Specifies an expiry date to the letter and/or how the services are to be terminated.