On occasion, Contract Administrators may resort to using a Letter of Intent (LoI) when starting work on-site is required to take place as early as possible, but when key components of the actual contract have not been clearly defined yet.

LoIs, however, should be avoided as much as possible as they carry risky legal implications due to the lack of clearly defined obligations. Unfortunately, commercial realities can steer contract administrators to rely on these simplified agreements to address complex matters.

To avoid long-term liability, drafters of LoIs aim to specify the scope of the service or work into a tightly defined parcel of work. Nevertheless, often these efforts to ‘keep it simple’ result in significant omissions with costly consequences.

These costly consequences can largely be avoided if the LoI in question addresses clauses of a standard form of contract (or classes of terms) that are agreed and are not under negotiation.  Similarly, to identify and express specifically the issues that are not yet agreed, and the steps to be taken if agreement cannot be reached within a reasonable time (which should also be defined).

It is necessary to note that courts have sought to categorise LoIs as either an ‘ancillary’ contract or as an ‘if’ contract, both subordinate to the main contract later drawn between two parties. When a final proposed form of contract that includes issues of price, delivery dates, and other terms and conditions is clearly defined, the Letter of Intent will have little contractual effect. This, of course, depends on the facts of any particular case.

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