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.

Leave a Reply