Letters of Intent

During the initial negotiation process of any shipbuilding project, letters of intent (or Memorandum of Understanding) are commonly utilized as the prelude to a formal contract. For example, even though the commercial principles, scope and the work to be performed have been agreed, there may be outstanding issues like financing, guarantees, technical, approval and other factors to be reckon with. At other times though, letters of intent could be signed on a conditional basis to bid for a project jointly, indicate interest or to explore areas of potential cooperation. Due to its innocuous nature, [i.e. its medium could be in simple letter format or even by emails], the seriousness of its implication can be easily overlooked, leading to nasty surprises.

In the case of Texaco, Inc. v. Pennzoil Co, ( a US case) involving a business merger, disputes arose under a Letter of Intent or Memorandum of Agreement. The result was a $10.53 billion award against Texaco, Inc. by Pennzoil ($7.53 billion in compensatory damages and $3 billion in punitive damages.) The letter was called a "Memorandum of Agreement" and had many features typical of the letter of intent and was subjected to certain conditions being satisfied. It was held that while any of the conditions taken separately, might indicate that the parties did not intend to be bounded to any agreement, there was sufficient evidence to conclude that the parties had reached an agreement on all essential terms of the transaction with only the mechanics and details left to be supplied by the parties’ lawyers.

In the UK, cases concerning letters of intent have been decided by examination of the intention of the parties, the surrounding circumstances and the precise wording used. In recent cases, proviso of words like “subject to” a formal contract being signed, were not considered a pre-condition to the existence of a contract if all terms had been agreed and work had proceeded on the basis of these terms.

Given the degree of uncertainties and legal technicalities, unless parties have effective quality management system in place to ensure that letters of intent are drafted or reviewed by qualified and competent personnel, managing the risk could be akin to living on the edge...save for those charitable few with really deep pockets.

Some good articles: keating and crown service