When two companies agree to do business together, it is often a struggle to agree all of the contract terms before the start date.
There are three alternatives: Proceed without a contract, delay the start date or issue a letter of intent. The first course of action should always be avoided. Delaying the start date is (from a lawyer’ perspective) the best option but is not always practical from a commercial perspective. This leaves the third option, a letter of intent.A letter of intent is a mechanism that allows the parties to start work before the contract has been finalised whilst, at the same time, providing both companies with some protection. However, they should be entered into with caution and only on an exceptional basis. This is because letter of intent will, by its nature, not cover all of the issues that need to be agreed, which can leave room for uncertainty and conflict.To be of value, a letter of intent should be binding on both parties and should set out key terms along with the scope of work to be undertaken under it. Much care needs to be taken in drafting a letter of intent to avoid uncertainty which can lead to disputes later on and expensive litigation.The letter of intent should be for a defined term and will set out the key terms and the work to be carried out under it. The terms of payment need to be specified along with terms relating to the quality of the goods or services to be provided and delivery dates. Terms will also need to be included to cover areas such as limitation on liability, insurance, TUPE and dispute resolution, together with any standard, or boiler plate, clauses.Consideration also needs to be given as to how the letter of intent is brought to an end. It is common to put in an expiry date. This has the advantage of concentrating minds on finalising the contract. One of the dangers of a letter of intent is that it is allowed to go on indefinitely with the result that if a dispute occurs, it is not covered by the terms of the letter of intent. However, it is also important to be aware of the expiry date. If the contract negotiations are protracted, it may be necessary to extend the term of the letter of intent. It is important to do so because, otherwise, a court may determine that there are no agreed terms between the parties. In any event, the letter of intent should state that it will be brought to an end once the formal contract commences.This information is for guidance purposes only and is does not constitute legal advice. For further information, please contact Richard Abbott at firstname.lastname@example.org