July 29th, 2019

Legal Talk ​25: How do I deal with my first big contract? The Letter of Intent.

You call again and I pick up. What's up, I say. 

You're very excited about developments. The big corporate that you’re dealing with is looking to put some really big business your way. You are a bit lost about how to take this forward now. You talked about general principles with a decision maker at the big corporate and all went well but what now?

I understand. It is always a bit of a dilemma:

On the one hand you would like to present some kind of full-blown contract and try to get it signed by the big corporate asap but this seems a bit pushy.

On the other hand, you could keep having these polite discussions with the big corporate and you just keep going around in circles with nothing concrete coming out of these talks. There’s always the danger that as time goes by, things might change and so the original excitement that the big corporate had about your project might just fizzle away.

I understand the dilemma. No need to panic!

First have a cup of tea and relax. You've done really well to get things to this stage. Let's talk about next steps. 

One way around this dilemma is to have a Letter of Intent (which sometimes called a memorandum of understanding or heads of terms). They are all pretty much the same thing really: just a list of terms that you and the big corporate can sign off as points of principle (on a NON-legally binding basis) just to capture the key terms of the deal. For more research here's another link explaining what a Letter of Intent is: https://www.investopedia.com/terms/l/letterofintent.asp.

“But if it’s non-legally binding then what's the point?” You ask. Good question.

It might help if I recap the key reasons for a letter of intent. These include: 

1. Clarity: It spells out the key points of principle in a couple of pages. If there are any deal breakers (i.e. no agreement on price or service specification or anything else) then at least these will be flushed out early on rather than you negotiating a long contract over days or weeks only to find out much later on that there was never any actual agreement over the key terms at the very start.

2. Emotion: Although the Letter of Intent is non-legally binding the people who sign off on it tend to treat it as if it is legally binding. This means that once they have made that commitment to signing the letter of intent the parties to the deal normally follow through on the deal by entering into a subsequent formal contract based on the letter of intent.

3. Special Clauses: There may be some terms in the Letter of Intent that are legally binding: typically these might include confidentiality, exclusivity (so each party confirms they are not talking to other people about the same things for the duration of the Letter of Intent) and choice of law (e.g. any dispute to be subject to English law & English courts). 

4. Follow Up: If the Letter of Intent is signed off then it is normally agreed that the points of principle will be expanded into legal wording in a longer contract. However, the normal rule is that the points in the Letter of Intent are followed closely and not contradicted in the longer contract that is based on the Letter of Intent. 

“So what should I do now?” You say.

Okay, what I would suggest is that you ask the decision maker at the big corporate if it would be okay if you put together some points of principle in a Letter of Intent (no more than 2 pages) and send them over to her for comments. If she says yes then she can add any points that she thinks are relevant. Once this is done, I can cast my eye over it and we can try to get the Letter of Intent signed off. 

Once that happens, we can try to follow up swiftly with a more formal contract based on the Letter of Intent. This should help you to get that big deal agreed asap.

“Fantastic,” you say.
 
You ask me if I have a template for this kind of letter of intent and yes, I do. I will send you the template and you can populate it and then send it back to me just to check it over, after which you can send it to the decision maker at the big corporate. 

Sounds like a plan, you say. You say that you have to go and will await my template so you can start working on this now. 

I'm excited about the progress you are making!

Do call me to say how things go with the decision maker at the big corporate! 

Best wishes


Jimmy Desai
Your Legal Coach

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