Letters of Intent: The How, Why and Why Not of Enforceability
A common form of agreement in the construction industry is the letter of intent. A letter of intent is essentially an agreement to agree. The parties are agreeing that they will work together on a project and work out the details later. But what happens when the parties fail to work out the details later?
If everything goes smoothly, there often isn’t a problem. But things don’t always go smoothly. What happens when a problem occurs before the contract is finalized? Is there an enforceable contract? And, if so, what are the terms of that contract?
Luckily, Illinois law does provide guidance for these types of situations. In fact, the Illinois Supreme Court, in Quake Const. Inc., v. American Airlines, Inc., 141 Ill. 2d 281, 289 (1990), outlined several factors used to determine whether a letter of intent will be binding:
1) Whether the agreement is of a type usually put into writing
2) The amount of detail in the agreement
3) The amount of money involved
4) Whether a formal writing is required
5) Whether the parties contemplated a formal written document at the end of negotiations
Establishing Enforceability — or Not — of a Letter of Intent
If the factors outlined by the Illinois Supreme Court apply to your case, you may be able to enforce a letter of intent. For the letter of intent to be enforceable, it must include all the “material terms” of the agreement, such as the parties to the agreement, the price, the work to be done and the date the work is to be completed. If the letter of intent does contain sufficient detail, then the terms of the contract are outlined by letter of intent itself.
In other situations, you may only want a letter of intent to serve as a starting point for further discussion. Because the letter of intent is typically not intended to be a formal agreement, it is important to know how to ensure that it does not become a binding contract. One way to achieve that goal is to specifically provide in the letter of intent that the negotiations are not binding unless and until a formal contract is actually executed. The Illinois Supreme Court has indicated that such a clause can ensure that a letter of intent is non-binding and intended simply for purposes of negotiation.
Experienced legal counsel can help you draft, enforce and defend letters of intent in a manner that achieves your specific business objectives. Please contact your Much Shelist attorney for more information on letters of intent and practical, real-world advice on related construction-law issues.