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Letters of intent – beware

When trying to conclude a commercial deal it is tempting for the parties to use a ‘letter of intent’ to cover the points they cannot agree on. 

As the name implies, a letter of intent is a temporary binding or non-binding agreement entered into while the parties conclude formal negotiations. Such letters may be used where they need to procure materials or start work before agreement on all of the formal contract terms (or the price) are concluded. Typically letters of intent are used in construction and engineering contracts.

The CA recently considered a letter of intent relating to facts going back some 15 years. The CA was prepared to find that by commencing work based on what appeared to be a letter of intent, the parties had therefore entered into a contract.

Given the potential liability which may arise many years later as a result of a letter of intent, contracting parties and their legal advisers should think very carefully about whether such a letter should be used at all and if so, what the terms should be.

The problem with a letter of intent is that it can allow the parties to put off reaching an agreement and possibly run the risk of never concluding the final contract.

Parties should ask themselves:

 

  • What happens if we never reach agreement on the final contract terms?

  • What do I need to ensure is expressly included in this letter as a consequence?

 

For a discussion of Arcadis v AMEC [2018] EWCA Civ 2222 see article by Charles Russell Speechlys.

 

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