acceptance. Options certainly represent one type of transaction to which the DCFR’s general recognition of unilateral binding undertakings can easily be put to good use.

7.  Letters of intent and preliminary contracts

In most jurisdictions, an indication of a future intention to contract which falls short of a clear offer to contract at the present time will not give rise to any legal effect, and will not be capable of being accepted in order to conclude a contract. This follows logically from the requirement that a party must demonstrate a willingness to be bound at law, either unconditionally (in the case of a unilateral promise) or conditionally upon the other party’s reciprocal willingness (in the case of an offer), before a legal obligation can arise. Consequently, what is commonly referred to as a ‘letter of intent’,190 if it is objectively a mere indication of future intention to contract rather than a promise or an offer (which it might be, despite being referred to by the issuing party as a letter of intent), will have no effect in law, whatever psychological comfort it may provide to the recipient. This position has been affirmed in, amongst other jurisdictions, Germany,191 England,192 and Scotland;193 by contrast, the DCFR does not specifically address the phenomenon. The inclusion of a statement that the contents of such a letter of intent are ‘subject to contract’ will usually assist in a finding against contractual liability resulting from the letter, the same holding true if the statement is to the effect that the parties have reached an agreement ‘in principle’.194

190Letters of intent are sometimes referred to as ‘comfort letters’, though there is also a tradition of restricting the latter term to cases where the intent expressed relates to the provision of a security or other financial undertakings. On this more restricted type of comfort letter, see Furmston and Tolhurst, Contract Formation, paras. 10.58–68. For a comparative discussion of letters of intent, see Moss, ‘The Functions of Letters of Intent’.

191See the standard German work by Lutter, Der Letter of Intent.

192British Steel Corporation v. Cleveland Bridge and Engineering Co. Ltd [1984] 1 All ER 504.

193Uniroyal Ltd v. Miller & Co. Ltd 1985 SLT 101.

194This position has been affirmed by the South African courts: see Titaco Projects (Pty) Ltd v. AA Alloy Foundry (Pty) Ltd 1996 (3) SA 320 (W), at 331. In Kenilworth Palace Investments (Pty) Ltd v. Ingala 1984 (2) SA 1 (C) parties who were acting under a bona fide but mistaken belief that they had reached an agreement were held not to be in a contractual relationship. Their position was not assisted by the inclusion in the defective agreement of terms that the parties ‘accept that it may be necessary to alter the structure upon which [the purported agreement] is based’ and for the purported agreement ‘to be converted into a full and comprehensive agreement’.

Whether a party intends to issue a genuine letter of intent, expressing merely its non-binding intention to contract in the future, or has gone further than this, will depend upon the proper interpretation of its words and conduct in the circumstances of the case. That interpretative process may disclose a different intention, including the following:

(a)  An intent to contract

Sometimes, despite the use of the language of a letter of intent by one or both parties, the parties are held to have demonstrated sufficient contractual intent to have concluded the contract which they were negotiating.195 This demonstrates that courts are looking not simply at the language used, but at the whole circumstances of the negotiations to determine the objectively manifested intentions of the parties.

(b)  A preliminary contract, envisaging a further contract

Though the language of a letter of intent may have been used, the party issuing it may be held to have issued a valid contractual offer, so long as what is contained in the communication demonstrates enough by way of minimum contractual content and a clear intention to be bound to constitute such an offer. That may be the case even if the intention is to enter in to a further, more detailed contractual relationship, to supersede the first, once the terms of this further contract have been negotiated and settled by the parties. In other words, the parties may have envisaged entering a holding or preliminary contract to govern their relationship pro tem, even if the language of a letter of intent was used.196 One qualification to this is that, if what is envisaged at the preliminary stage is the granting

195Uniroyal Ltd v. Miller & Co. Ltd 1985 SLT 101; Damon Cia SA v. Hapag-Lloyd International SA (‘The Blackenstein’) [1985] 1 All ER 475; Canada Square Corp. Ltd v. Versa Food Services Ltd (1981) 130 DLR (2d) 205, 34 OR (2d) 250.

196See, for instance, the UK Supreme Court case RTS Flexible Systems Ltd v. Molkerei Alois Müller GmbH & Co. KG (UK Production) [2010] UKSC 14, in which the letter of intent was held to form the basis of a ‘letter of intent contract’. For Scotland, see Robertson Group (Construction) Ltd v. Amey-Miller (Edinburgh) Joint Venture [2005] CSIH 89, where even though a letter from the defender contained the wording ‘while it is our intention to enter into a contract with you’, the letter was nonetheless held to be an offer of a preliminary contract capable of acceptance by the conduct of the pursuer in commencing work on site. See also Newport Limited v. Sears, Roebuck & Co., 6 F. 3d 1058 (5th Cir. 1993), in which the Fifth Circuit of the US Court of Appeals, applying Louisiana law, held a letter of intent the basis of a valid contract.

of a discretionary right to another party, such a circumstance is usually classed as the grant of an option (or option contract), a subject discussed in the previous section.

Can any preliminary contract contain, or indeed be constituted solely by, an obligation to negotiate a further contractual relationship of indeterminate content at some point in the future? The traditional answer of the Common law to that question has been in the negative: a duty to negotiate a future contract of indeterminate content cannot be made binding in law, whatever its moral status may be, even if such duty is stated in good faith terms. Such an obligation, it is said, would be too uncertain to be enforceable at law, a position enunciated by the House of Lords in a decision discussed earlier in relation to the question of duties arising during the contract negotiation stage, Walford v. Miles.197 A similar position is adopted in Scotland198 and South Africa.199 Matters may be otherwise if parties provide in a preliminary agreement for the negotiation of a contract, failing consensus on which terms are to be settled through some mechanism such as the decision of a third party arbiter. Given the provision of a mechanism for determination of outstanding matters, such a contract would not be void for uncertainty.

While the negative attitude towards a duty of good faith demonstrated in Walford v. Miles is in stark contrast to the principle of good faith embodied in §157 BGB, the position of German law in relation to contracts to negotiate is otherwise quite similar to that of English law. In Germany, parties may enter a ‘pre-contract’ (Vorvertrag) in which they undertake to enter into a further contract, but only so long as the terms of the further contract are determined or determinable under the precontract; if they are not, the alleged pre-contract is void.200

(c)  An expectation of a formal contract

A further alternative interpretation of what has been intended by parties is that, while one party intended to make an offer, expecting an acceptance to be forthcoming in turn, this may have been on the understanding

197[1992] 2 AC 128.

198R & D Construction Group Ltd v. Hallam Land Management Ltd [2009] CSOH 128.

199See Shell SA (Pty) Ltd v. Corbitt 1986 (4) SA 523 (C). For recent approval of this view, see

Shoprite Checkers (Pty) Ltd v. Everfresh Market Virginia (Pty) Ltd t/a Wild Break 166 (Pty) Ltd [2010] ZAKZPHC 34.

200See the decision in RGZ 124, 81, for an example of a contract held to be void for just such a reason.

that no binding contract would arise until the agreement was embodied in formal documentation. That may have been the intention whether or not the law requires a contract of the type in question to comply with such formalities. In such a case, though we are not dealing with a classic letter of intent, a contract will nonetheless not arise until compliance with the relevant formalities is achieved.

(d)  An expression of intention to do something other than contract

Yet a further possibility is that a communication may express the intention of a party to do something without that something necessarily being to enter into contract with the recipient of the communication. For instance, at the request of B, A may express to C its intention to pay C a sum of money. Unless the circumstances disclose that C has an enforceable third party right under a contract between A and B, could the mere communication of A to C found any claim by C to payment? In jurisdictions with a requirement of mutual consideration, this seems very unlikely. But even in those without such a requirement, it may be hard to view A’s statement as in any sense binding. While it might, for instance under Scots law, amount to a unilateral promise, again it would be a question of interpreting the precise language used by A to ascertain whether A ought to be held objectively to have intended to bind himself through the words used. In one Scottish case,201 a letter sent by A to C stated:

We confirm receipt of a letter … from [B] a copy of which is attached, requesting us to amend remittance instructions [i.e. by paying C rather than B]. We undertake that we shall comply with [B’s] irrevocable instructions therein.

A subsequently failed to pay C as it had ‘undertaken’ it would. The court held that A’s undertaking should not be interpreted as a promise, because it was unlikely that A would have intended to grant such a promissory right to C, a party with whom it had had no prior dealings. A’s letter was rather a non-binding confirmation of its intention to act, and gave rise to no legal duties. The English courts have taken a similar attitude to a comfort letter issued to a party with whom the issuer has had no prior relationship.202 In a subsequent Scottish case, an undertaking by a board of trustees expressing its intention to transfer funds to a party was again held non-promissory in nature.203

201Krupp Uhde GmbH v. Weir Westgarth Ltd 31 May 2002 (unreported).

202Kleinwort Benson Ltd v. Malaysia Mining Corp. Bhd. [1989] 1 All ER 785.

203Cawdor v. Cawdor [2007] CSIH 3, 2007 SLT 152.