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Agreeing To Agree Can Be Dangerous: Tread Carefully With Letters Of Intent

Thursday, October 04, 2007 12:52 pm

 

Given the fast pace of the construction business and slow pace of contract negotiations, contractors and subcontractors often begin work with nothing more than a letter of intent. This seems convenient -- until one of the parties changes its mind. In common law, a mere letter of intent offers none of the protections of a contract. We'll discuss the dangers of letters of intent, as well as some of the fine points of what distinguishes them from enforceable contracts.

Something less than a contract

From a business standpoint, a letter of intent is a document that signals the intentions of one or more party. As such, it may serve a legitimate business purpose -- such as communicating a need or indicating an interest to work on and be informed about a project. But, from a legal standpoint, letters of intent typically do not stand up as contracts in courts and hence are not enforceable. Two common problems that occur as a result are: • A general contractor decides to award the contract to a different subcontractor from one that believed there was a firm commitment due to a letter of intent. • The parties fail to agree on terms and conditions after work has already begun.

In either case, it's clear that the subcontractor is at risk of lost profits, unpaid expenses and costly litigation just to get paid. However, don't overlook the risks to general contractors. Litigation from a company that thinks it deserves a contract because of a misconstrued letter can be expensive. Moreover, the absence of a valid contract could allow a subcontractor to back out in the middle of a project, leading to costly delays.

What makes it a letter of intent?

The fact that a document is called a "letter of intent" doesn't automatically preclude it from being viewed as a contract -- nor does every document that indicates intentions but fails to hold up as a contract use the words "letter of intent." However, when certain key elements are missing from a letter specifying work, it fails to be a valid contract.

Even if a document is signed by both parties and contains elements typically found in contracts, courts may consider it non-binding if the language suggests that it's merely an agreement to come to a firm agreement in the future. Often, lawyers and judges refer to this as an agreement to agree.

Phrases that turn binding contracts into mere letters of intent

States differ somewhat on what causes a document to be a non-binding agreement to agree, or promise to promise. F [...]

 
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