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State your intentions…

This week, we have reported on another Court of Appeal decision on a letter of intent. (Earlier this year, the Court of Appeal gave judgment in RTS v Muller.) The case (Whittle v Hollywood) sounds very rock and roll…

…but unfortunately relates to nothing more showbiz than a distribution agreement, involving deliveries of goods to cinema chains, with no film stars in sight.

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When we put together our note of the case, we were very much aware of how widely read our materials on letters of intent are (we publish a practice note and a standard document, which amends the CLLS standard form).

Given that a letter of intent has the capacity to regularly cause parties (it seems) to fight things out in the Court of Appeal, why, on the face of it, do they remain so popular?

Letters of intent are a nuisance (and dangerous)

Some argue that letters of intent are a nuisance, if not downright dangerous, and should be avoided at all costs. Certainly, many of you will have experienced the point when you realise that a “simple” letter of intent has been sent backwards and forwards for two months. During this time, the formal terms of contract have stalled, because attention turns to the letter of intent, including arguments about the exact works to be performed and the terms governing that performance.

From a purely legal perspective, the argument against letters of intent continues something like this. Can something that can be:

  • A binding mini-contract (for example, to carry out preparatory works, such as demolition, for a fixed sum);
  • A binding contract incorporating a much more detailed contract (in effect, not a letter of intent at all, but a full building contract incorporating JCT terms, or similar); or
  • No contract at all (a letter of comfort with no legal effect)…

…ever be a good idea? How is the lay person ever expected to understand whether what he is signing is a contract or no contract at all? Whether it will give him a contractual right to be paid, a quasi-contractual right to be paid (such as a quantum meruit claim) or a right to some other legal restitution?

Letters of intent are quick and simple

Those who favour letters of intent sensibly point out that they can be used to allow a quick start on site, to place materials on pre-order, or can allow the parties appropriate breathing space to agree the last couple of key commercial terms, before the building contract is finally executed.

Most supporters of the letter of intent suggest that they should be used more as a scalpel than a sledgehammer. That is, to allow fine details to be addressed without stalling the project, rather than to allow a start on site without any idea of the legal terms that will govern the project.

Clarity matters

Wherever you stand on the debate, if you use a letter of intent, always state your intentions very clearly, and then stick to them. The case referred to at the start of this post, Whittle, is yet another case where one party argued it has a formal contract and the other party said “no”. There was room for doubt and the Court of Appeal overturned the first instance judge’s finding that there was a contract between the parties.

That leaves Whittle to fight another day, claiming that Hollywood got a short term distribution contract at a long term distribution contract price.

One thought on “State your intentions…

  1. I have found it useful to stop using the expression “letter of intent”. I think we all have the remnants of a preconceived idea as to what we think that expression means despite warnings to the contrary. If instead we just use the expression “letter” then the natural next step is to ask what it says. Looking at what the document says (rather than thinking about what it’s called) will hopefully point us in the right direction.

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