The Independent Counsel

Contracts


Letters of Intent


BY JOSEPH VALOF

The letter of intent can provide the business person with a vital bridge between mere discussions and a binding contract. However, the huge damages award under the infamous Pennzoil v. Texaco case of the last decade demonstrated some of the pitfalls inherent in this commonly used business tool. The following should help your company to avoid those pitfalls.

Purpose

The main purpose of a letter of intent (sometimes also referred to as a “Letter of Understanding” or “Memorandum of Understanding”) is to facilitate the start of a business deal or project between the parties involved by identifying the key business and contractual understandings that will form the basis of the final contract.

Drafting Issues

In one recent case, the letter of intent clearly stated: “This letter of intent is not intended to create, nor do you or we presently have any binding legal obligation whatever ” But, in the very next paragraph the following statement was made: “[H]owever, it is our intention, and we understand, your intention immediately to proceed in good faith in the negotiation of such binding definitive agreement.” Schwanbeck v. Federal Mogul Corp., 412 Mass 703 (1992). The court held that the word “however” coupled with the intention to “proceed in good faith” created an obligation independent to the sweeping disclaimer that the letter of intent was non-binding.

Form Letter of Intent

The following might serve as a guide for your own letters of intent:

Mr. John Smith
[XYZ company address]

Dear Mr. Smith:

Purchaser intends to purchase, and XYZ intends to sell certain computer hardware. The purpose of this Letter of Intent is to summarize our discussions to date and to confirm our respective intentions with respect to the proposed transaction, as follows:

This is a letter of intent only. It is not intended to be, and shall not constitute in any way a binding or legal agreement, or impose any legal obligation or duty on either Purchaser or XYZ, Inc. If the foregoing reflects our mutual statement of intention, please sign and return the enclosed copy of this letter.

Sincerely,
Purchaser
Agreed:
By:
Title:
Date:

Comment: Avoid overstating your case in a letter of intent because, if you say too much, you may find yourself committed to more than you bargained for.
Mr. Valof will discuss another pre-contract tool in our next issue, that of the “teaming agreement,” whereby two or more contractors bind one another to bid jointly for a government contract.

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1996; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.