Quick Tip #17: Can I just put in place a letter of intent?
Letters of intent (sometimes referred to as ‘heads of agreement’ or 'heads of terms’ or ‘memoranda of understanding’ or ‘MOUs’ – we’ll just use ‘LOI’ to refer to any one of those) are meant to be non-binding expressions of intention with respect to a transaction that are signed before entering into a definitive agreement. However, LOI’s are often put forward where the parties need to commence the relevant services but have not yet concluded negotiations for the main contract. As a result, they quickly evolve into a binding set of terms for interim services (which we will call an ‘ISA’, or interim services agreement) rather than non-binding expressions of intention. Although LOI/ISA’s can provide helpful flexibility in these circumstances, they need to be treated with the utmost caution, with their value queried and their risks considered.
Firstly, the parties should consider carefully whether the time spent negotiating the LOI/ISA would actually be better spent finalising the main agreement. We consistently see negotiations for LOI/ISA’s becoming protracted and ultimately taking the same amount of time (if not longer than) it would have taken to finalise the main agreement. This of course nullifies the benefit of adopting an LOI/ISA.
Secondly, make sure that the effectiveness of the LOI/ISA is conditional on concluding the main agreement by an express date. The parties often also lose momentum after signing the LOI/ISA to negotiate the actual agreement and an express provision in the LOI/ISA forcing that negotiation will help to ensure that the main agreement does get signed. If the parties have to rely on an LOI/ISA because they never actually entered into a main agreement, this could cause serious complications. For example, if one of the parties wishes to exit the relationship, or there is a breach, the provisions of the LOI/ISA are likely to be sub-optimal to govern either of those scenarios.