INTENTIONS OF LETTERS OF INTENT

Water utilities, and business entities in general, often sign letters of intent or memoranda of understanding as part of a contract negotiation process. Typically, parties may have had discussions resulting in agreement as to some terms of a proposed contract but need more time to resolve remaining issues and terms. To memorialize the understanding so far, they may enter into a letter of intent.

Depending how a letter of intent is drafted, it may have become or may not have become an enforceable contract. A letter of intent generally per se is not a contract. Enforceability of such a document depends on whether a court can find an intention to be bound by its terms and that those intentions and the stated terms are sufficiently definite and specific.

The most common method employed to assure that a letter of intent does not become a contract is to insert a provision to the effect that it is not a contract and there is no contract until and unless a written definitive agreement is developed and mutually signed by the parties in the future.

Even with such a provision, however, a non-contract can become an enforceable contract as to certain terms within the letter of intent. For example, it may include an agreement for a deadline in negotiations or preparation of a definitive agreement; or it may provide for confidentiality as to the negotiations or information exchanged between the parties; or it may include a prohibition against negotiating with other possible parties. These sub-agreements within a letter of intent may become enforceable by themselves, even if the letter of intent has not become enforceable as to the substance of the proposed underlying transaction.

As is true for all contracts generally, parties to a letter of intent must draft their document to clearly evidence their intent-- so clearly that a court can interpret the language as the parties truly intended and not order a result that no party ever intended. The road to court often is paved with the best of intentions until a pothole of un-clarity is encountered.