It is not uncommon for owners/developers who solicit proposals from contractors, and contractors who solicit proposals from subcontractors, to send a Notice of Intent or Letter of Intent to the contractor or subcontractor before signing a formal contract, announcing that the proposal has been accepted. Depending on the wording of the notice, a contract may well be formed between the parties even if the contemplated formal document is never sent or signed.
Although the word “intent” may suggest a mere expression of what the writer expects to happen, the LOI's wording will occasionally suggest something more. For example, when the LOI states that the author will be sending a formal contract for signature, that promise may reasonably be deemed unequivocal, and not suggestive of negotiations still to come.
The usual legal requirements for a valid contract – offer, acceptance and consideration – can all be present in a LOI. The sticking point is usually the requirement of “a meeting of the minds about the contract’s terms: ‘each party must have the same understanding as to the terms of the agreement.’” International Business Machines Corp. v. Khoury, 170 N.H. 492, 500 (2017) (citation omitted). But a meeting of the minds is judged under an objective standard, which “places a reasonable person in the position of the parties, and interprets [contractual terms] according to what a reasonable person would expect [them] to mean under the circumstances.” Id. at 501 (citation omitted). So the question becomes, would the recipient of a LOI reasonably understand that an agreement has been reached on the essential terms of a contract?
What counts as an “essential” term of a contract can be fuzzy. Our Supreme Court has adopted the dictionary definition of the word, “constituting an indispensable ... condition of a thing,” “necessary,” “important in the highest degree,” and “unavoidably significant.” Behrens v. S.P. Construction Company, Inc., 153 N.H. 498, 505 (2006). In construction contracts the price, scope of work and time for performance are generally viewed as essential. If the LOI references a proposal or other document that contains typical price, scope and schedule terms of a normal construction contract, it may be fair for the recipient to understand that those terms have been agreed to – and reasonably conclude that anything that may show up in a later, more formal contract document is window dressing.
Sometimes the LOI will contain conditional language – for example, one sent to a subcontractor which is conditioned on an award of the prime contract to the general contractor. This type of LOI can become binding once the condition is fulfilled. Other times the LOI’s conditions may end up being deemed unessential formalities. In Blais v. Remillard, 138 N.H. 608, 612 (1994), “the defendants argue[d] that the buyer’s reservation of the right to have his attorney review the contracts was a condition precedent to the buyer’s acceptance of the terms of the contract and, thus, that there was no actual meeting of the minds. While a reasonable jury might have found in the defendants’ favor, it need not have done so and could have found the proposed review merely perfunctory.”
It is easy for the author to eliminate any risk that his LOI will be interpreted as a binding contract, simply by reciting that the LOI is not intended to be binding and/or expressly stating that until another document is signed there is no contract. If such a disclaimer is present, the recipient could not reasonably believe that a contract is already in place. But without such a disclaimer, the matter is less certain. As one court has put it, “The fact that parties contemplate that a formal agreement will eventually be executed does not necessarily render prior agreements mere negotiations, where it is clear that the ultimate contract will be substantially based upon the same terms as the previous document.” Chicago Investment Corp. v. Dolins, 107 Ill.2d 120, 126, 481 N.E.2d 712 (1985).
Lastly, if the LOI instructs the recipient to begin preparations for performance or take action that would constitute part performance, it is far more likely that the LOI will be construed as a binding contract.
Although the word “intent” may suggest a mere expression of what the writer expects to happen, the LOI's wording will occasionally suggest something more. For example, when the LOI states that the author will be sending a formal contract for signature, that promise may reasonably be deemed unequivocal, and not suggestive of negotiations still to come.
The usual legal requirements for a valid contract – offer, acceptance and consideration – can all be present in a LOI. The sticking point is usually the requirement of “a meeting of the minds about the contract’s terms: ‘each party must have the same understanding as to the terms of the agreement.’” International Business Machines Corp. v. Khoury, 170 N.H. 492, 500 (2017) (citation omitted). But a meeting of the minds is judged under an objective standard, which “places a reasonable person in the position of the parties, and interprets [contractual terms] according to what a reasonable person would expect [them] to mean under the circumstances.” Id. at 501 (citation omitted). So the question becomes, would the recipient of a LOI reasonably understand that an agreement has been reached on the essential terms of a contract?
What counts as an “essential” term of a contract can be fuzzy. Our Supreme Court has adopted the dictionary definition of the word, “constituting an indispensable ... condition of a thing,” “necessary,” “important in the highest degree,” and “unavoidably significant.” Behrens v. S.P. Construction Company, Inc., 153 N.H. 498, 505 (2006). In construction contracts the price, scope of work and time for performance are generally viewed as essential. If the LOI references a proposal or other document that contains typical price, scope and schedule terms of a normal construction contract, it may be fair for the recipient to understand that those terms have been agreed to – and reasonably conclude that anything that may show up in a later, more formal contract document is window dressing.
Sometimes the LOI will contain conditional language – for example, one sent to a subcontractor which is conditioned on an award of the prime contract to the general contractor. This type of LOI can become binding once the condition is fulfilled. Other times the LOI’s conditions may end up being deemed unessential formalities. In Blais v. Remillard, 138 N.H. 608, 612 (1994), “the defendants argue[d] that the buyer’s reservation of the right to have his attorney review the contracts was a condition precedent to the buyer’s acceptance of the terms of the contract and, thus, that there was no actual meeting of the minds. While a reasonable jury might have found in the defendants’ favor, it need not have done so and could have found the proposed review merely perfunctory.”
It is easy for the author to eliminate any risk that his LOI will be interpreted as a binding contract, simply by reciting that the LOI is not intended to be binding and/or expressly stating that until another document is signed there is no contract. If such a disclaimer is present, the recipient could not reasonably believe that a contract is already in place. But without such a disclaimer, the matter is less certain. As one court has put it, “The fact that parties contemplate that a formal agreement will eventually be executed does not necessarily render prior agreements mere negotiations, where it is clear that the ultimate contract will be substantially based upon the same terms as the previous document.” Chicago Investment Corp. v. Dolins, 107 Ill.2d 120, 126, 481 N.E.2d 712 (1985).
Lastly, if the LOI instructs the recipient to begin preparations for performance or take action that would constitute part performance, it is far more likely that the LOI will be construed as a binding contract.
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