Contract Law

Letter of Intent vs Letter of Undertaking

letter of intent

  • A letter of intent is generally not legally binding unless both parties intended that it should be enforceable and it does not refer to a resulting future contract. On the other hand, the law imposes an obligation to pay a reasonably price for work done pursuant to a request under the principle of quantum meruit. A letter of undertaking is contractual in nature and failure to comply with it will result in a breach of obligation.

 

LETTER OF INTENT

 

  • A letter of intent (LOI) is a document which expresses the intention of a party to enter into a contract at a future date by outlining the terms which are intended to be included in a finalised agreement. As a general principle, a LOI is not legally binding save in exceptional circumstances. However, many LOIs contain provisions that are binding such as non-disclosure agreements, a covenant to negotiate in good faith, or a “stand-still” or “no-shop” provision which promises exclusive rights to negotiate.

 

  • The Supreme Court in Ayer Itam Tin Dredging Malaysia Berhad v. YC Chin Enterprise Sdn. Bhd. [1994] 2 AMR 32:1631 held that generally, an arrangement made “subject to contract” or “subject to the preparation and approval of a formal contract”, and similar expressions, would be construed to mean that the parties were still in a state of negotiation and did not intend to be bound unless and until a formal contract was exchanged.

 

 

  • However, having said that, there are still exceptional circumstances which can cause a LOI to be legally binding despite having a “subject to contract clause”. In determining whether any liability shall attach to the person who issues the LOI, the Court will scrutinise the terms of the document and the circumstances in which it came to be written (See Turriff Construction Ltd. and Turriff Ltd. v. Regalia Knitting Mills Ltd. [1971] 9 BLR 20 (QBD)). Where the LOI indicates that both parties intend that it should be enforceable and it does not refer to the execution of a formal contract in the future, the LOI can constitute an agreement between the parties.

 

  • On the other hand, it is to be noted that even if both parties expect a formal contract to eventuate, but one party requests the other to commence work, the work done is treated as having been done under the expected contract, and if no contract is entered into, the party carrying out the work at the request of the other, can claim payment under the principle of quantum meruit, i.e. a reasonable price for work done pursuant the said request.

 

LETTER OF UNDERTAKING

  • An undertaking from a bank is similar in effect as that of a bank guarantee, performance bond or standby letter of credit. The definition of a valid undertaking adopted in Public Bank Bhd v Perwira Affin Bank Bhd (2001) 7 CLJ 447 HC was “a pledge, a promise and a guarantee”.

 

  • The construction to be given to an undertaking is similar to that applied to an ordinary contract (See Michael C Solle v. United Malayan Banking Corporation [1984] 1 CLJ 151). Thus, a breach of an undertaking attracts damages in the same manner as a breach of contract.

Beware of What You Agree Online

esign

Most often than not, we couldn’t bother much about what we click or agree to via the internet web. Prior to obtaining more information or services  from a website, we are usually required to click on the web button “Agree” or in other words, we have to e-sign the contract or statement prepared by the online website owner. Hence, the issues of validity, enforceability and admissibility in court of such contract entered by way of e-signing are discussed here.

For instance, ABC Company is developing a pricing request system which will have the ability to generate Standard Sales Contract (“the Contract”). The system will send an email containing a link to the sales contract to the appropriate customer representative for the customer to ‘e-sign’. The customer representative will then click on the link to which he will see a screen which requires him to acknowledge that he is representing the customer company and is willing to make decision on the company’s behalf.

Once acknowledged, a second screen will appear which allows the customer to print a draft of the Company Sales Contract and then proceeds to a third screen where the customer is asked to indicate whether he agree to the terms and conditions of the Company Sales Contract. (i.e. click on ‘Agree’ or ‘Do Not Agree’). If the customer selects ‘Agree’, then the customer is deemed to have ‘e-signed’ the contract.

Under Malaysian law, all contracts entered in regardless of their method are governed by the Contracts Act 1950.  As for the said Contract, it may be admissible in Court under s90A of the Evidence Act 1950 which provides that any document or statement produced by a computer are admissible in court.

Based on the facts given, the issue that may arise is whether or not the customer representative who ‘esigns’ the said Contract has the authority to enter contract on behalf of the company.

The customer representative must be authorized to sign on behalf of the company. A Director who has been authorized by the company resolution can enter contracts on behalf of the company but as for agents, this would depend whether or not they have been given the authority to do so.

Agent and Principal

Section 135 Contracts Act 1950 provides that:-

135. An “agent” is a person employed to do any act for another or to represent another in dealing with third persons. The person for who, such act is done, or who is so represented, is called “principal”.

An employee of a company may also be an agent of the firm. In MMC Power Sdn Bhd & Anor v Abdul Fattah B Mogawan & Anor [2001] 1 MLJ 169, it was held on appeal that the Defendants were bound by the acts of their employee who was given authority to act on behalf of the company. Hence, based on the said case, the company will be bound by the acts of a customer representative who may also be an employee of the company.

But if the customer representative is not an authorized person to enter contracts on behalf of the company, then the said contract shall not bind the company even though the customer representative acknowledged that he has authority to do so.

In the event that an issue arises on the legal capacity of the customer representative, we may rely on the agency by estoppel rule or the Indoor Management Rule.

 Agency by Estoppel: Apparent and Ostensible Authority 

Agency by estoppel arises where one person acted as to lead another to believe that he has authorized a third person to act on his behalf, and that other such belief enters in transactions with the third person within the scope of such ostensible authority.

However, the agency by estoppel rule only applies when a company leads the third party to believe that an agent (i.e. customer representative) is acting on his behalf. In our case, the representation that the customer representative is acting on behalf of the company is done by the customer representative himself and hence the agency by estoppel rule doesn’t apply.

Indoor Management Rule (Turquand’s rule)

This rule, derived from the case of Royal British Bank v Turquand (1855) 5 E & B 248 applied in the Malaysian case of Standard Chartered Bank v Central Wood Tiles Sdn Bhd [1990] 2 MLJ 361, provides protection to persons dealing with a company in good faith. An outsider dealing with a company does not need to enquire into the regularity in the internal affairs and proceedings of the company, and may assume that all is being done regularly (see K Sivapragasam a/l Krishnar v Renominium Development Sdn Bhd & Ors [1998] 4 MLJ 535).

However, the Indoor Management Rule has its limit. Pennington’s Company Law (2nd Ed) at pp 137-138 expressed the rule in Turquand’s case and its limits, in the following terms:

The rule prescribed that if a person deals in good faith with the board of directors or other representative body of a company which is in fact exercising powers of management and direction of its business and affairs, that person is not affected by defects of procedure within the company or by its failure to fulfil conditions which are required by the company’s memorandum or articles to be      fulfilled before the act or transaction in question is effected

In another words, the rule is only limited to deals with the board of directors or other representative body of a company. If the customer representative is an individual low in the corporate hierarchy, we cannot take advantage of the rule in Turquand’s case (Mahfuz Bib Hashim v Koperasi Pekebun Kecil Daerah Segamat & Ors [2005] 3 MLJ 726).

Letter of Comfort

comfort

What is a Letter of Comfort?

It is a written assurance, often issued by the seller’s parent company or bank, which is intended to offer “comfort” to the buyer as to the seller’s ability or willingness to perform its obligations. Commercially, they may also be used to supplement or clarify the loan documents. Generally, comfort letters are not intended to be legally binding obligations but is usually a statement of moral responsibility. Comfort letters are issued because the seller is unable or unwilling to provide a bond or guarantee of performance.

Purpose of a Letter of Comfort

A comfort letter is used by the parent company to encourage a lending institution to issue a credit to a subsidiary. The purpose of having a comfort letter is to encourage the lending institution to enter into a legally binding transaction with the subsidiary company while attempting to avoid liability if the subsidiary fails to perform. Reasons for using a comfort letter are:

- seller’s guarantee facility may have been reached and it may be unable to procure further guarantees.

- seller is not empowered to obtain a guarantee because of financial constrains or its constitution or borrowing facilities

- issuer of the comfort letter may be unwilling to undertake a binding legal obligation on behalf of the seller.

- if the seller’s parent is to issue the letter, the parent may wish to preserve its own credit ratings and gearing

- unlike guarantees, on demand bonds and standby letter of credit, comfort letter are not required to be noted in a company’s           accounts as contingent liabilities.

Is a Letter of Comfort legally binding?

Comfort letters are usually not meant to be legally binding. However, this may depend on the party’s intention and how the letter is drafted. Thus, the effect of the letter may vary from non-binding statement of present intention (usually the case) to a legally binding contractual obligation. It is thought that because of how a letter of comfort is drafting, it may lead to subsequent involvement of the drafting party in the agreement itself. If so, this may just cause the letter of comfort to be part of the implied contract and assume the drafter to be the guarantor.

When is it legally binding?

It is legally binding if the party’s intended it to be so. Overall context of the transaction in which the comfort letter was written, the language of the letter may lead the court to to find the letter as part of an implied contract. If a parent company of a subsidiary which later became insolvent had a letter which contained a statement such as

“It is our policy to ensure that the business of (the subsidiary) is at all times in position to meet its liabilities to you under (the facility).”

This may not amount to a contractual promise as it was merely a statement of present fact. If the statement was inaccurate when given, the the buyer could have brought an action against the issuer in deceit or misrepresentation (refer to Benson Limited v Malaysian Mining Corporation Bhd (1989) 1 WLR 379).

Other examples of statements which may not be legally binding:

- “We are confident that our subsidiary will be able to meet its obligations to you”

- “We will not take any action which would prevent our subsidiary from fulfilling its obligations to you”

However, a comfort letter may sometimes contain express wording to the effect that it does not intend to be legally bound to reinforce the non-binding effect of the letter. This does not mean that it will not be bound. If it still contains the essential elements of a contract such as offer, acceptance, consideration, intention to create legal relations, it will inevitably lead to it being a legally binding contract. It would not matter if “comfort letter” is expressly stated on the letter because it constitutes a binding undertaking. However, if it is found to be a legally binding contract, resulting loss and damage may be difficult to prove.