Letter of intent


A Letter of intent may be very similar to heads of terms or a memorandum of understanding, produced after discussion between the parties to record an understanding between the parties but it may also operate unilaterally, i.e. by one party stating to another an intention to participate in a contractual relationship on the terms of a letter of intent rather than purporting to set out an understanding of agreed commercial terms negotiated by the parties.

It is extraordinary that such a simple concept should, increasingly, generate such controversy and legal precedent but it has become something of a potential minefield for the innocent business person. The watchword when receiving a letter of intent or thinking about sending one, must be “BE CAREFUL”. You may be getting more (or less!) than you think


  •  A letter of intent, is typically sent by an intending buyer following negotiations for the sale and purchase of goods and/or services.  Why?  Why not simply place an order?
  • The principal reason is that, whilst the intention may exist, the terms upon which the intending buyer will buy and the seller will sell (such as price and delivery dates) have not yet been agreed.
  • The intending buyer may wish to ensure that the goods or services he requires are in stock or immediately available and wii remain so until they are finally secured by the intended contract.
  • The buyer may wish the supplier to place components on order to enable the manufacture of the goods the intending buyer wants to buy..
  • The buyer may wish to incentivise a contractor to gear up staffing levels, so that work/production can begin as soon as contractual terms can be agreed
  • letters of intent have long been regarded as being of no binding effect but that is no longer the rule in certain circumstances .
  • Letters of intent may enable the prospective seller to persuade its bank to make finance available to fulfill the contract when terms are finalised.

Traditional Position on non-binding effect of letters of intent

Until quite recently letters of intent were regarded as having no binding effect save in exceptional circumstances. There are many cases which support that proposition.

More recently the courts have handed down judgments supporting the concept of contractual or extra contractual obligations arising from letters of intent. There are many examples but one case in particular demonstrates the way the accepted thinking has evolved.

The judge in a 1992 case explained in his judgment

A letter of intent can give rise to three possible situations:

  • There may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other
  • There may be what is sometimes called an ‘if’ contract, i.e. a contract under which A requests B to carry out a certain performance and promises B that if he does so, he will receive a certain performance in return, usually remuneration for his performance
  • If no contract was entered into, then the performance of the work is not referable to any contract, the terms of which can be ascertained and the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as had been done pursuant to that request.”


If the terms are clear by all means put them in a memorandum. If there are areas of disagreement but a general desire to solve the problems you are probably best advised to involve the lawyers and make sure the agreement says all you want it to say.

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