Good intentions?

Keen for work on a new supply service to commence, a supplier and customer sometimes resort to a letter of intent (LOI), on the basis that detailed negotiations for the main supply contract will follow.

What happens though if one is never signed – because the parties never get round to addressing the issue or where one party gets a better offer and wants to exit early?

Neither party can be sure that the LOI they signed months earlier will get them out of trouble.

Of course some LOIs go into more detail than others, but any shortcomings will only become clear once the trading problem has arisen.

The issues are likely to be:

1 Are they governed simply by the LOI?

2 If they had reached the stage of agreeing the wording in the detailed contract, does the unsigned version have legal effect?

3 If not, what other contractual relationship is there?

Two recent court cases illustrate the uncertainties for all. In one, the LOI did not set out what was to happen if a full contract was not agreed by the specified time limit.

The unsigned final form long-term contract did not apply since it had to be signed by both parties. Here the supplier managed to produce evidence of a new contract – and to entitle it to claim further money.

In another case on the same basis, there was no correspondence trail to support a further contract; the supplier could only claim the relatively small sums specified in the LOI.

Disputes can be extremely disruptive to the smooth running of a business. There is a high risk to both supplier and customer if detailed terms of a deal are not concluded and recorded before the service commences, even where both managements believe they are “in contract”.

copy; S Calnan 2009

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