Only the Executive Director of Purchasing may issue a Letter of Intent.
Letters of intent From: The Institute for Supply Management Task 1-A-4 Manage the preparation and/or issuance of contracts/purchase orders/agreements.
A) Purpose — The ISM Glossary defines a letter of intent (LOI) as a pre-contractual document used to express expectation of contract formation in the future. When properly drafted, the LOI should create no binding obligation on either party. The letter of intent anticipates that it will be superseded by subsequent documentation containing the same terms and conditions along with additional terms and conditions. The purpose of a letter of intent is to gain time prior to the issuance of a more complete contract or purchase order. Situations where a letter of intent may be used include the following:
- Reserving a place “in line” for standard equipment when the formal purchase document approval system may require more time.
- Basing volume discounts on future business without giving a firm order for the whole quantity (note that prices are usually renegotiated if actual volume does not satisfy the discount structure).
- Encouraging a seller to stock items of interest to the organization.
- Providing the supplier with evidence to secure bonding.
B) Types — There are two types of letters of intent: binding and nonbinding. The distinction depends primarily on the language used in the letter.
1.0 Binding — The supply management professional may be bound by a letter of intent, even if he or she does not wish to be, unless steps are taken to prevent this. For example, if both parties sign a memorandum confirming negotiations or agreement in principle, they would likely be bound by contract unless the memorandum clearly and explicitly states that neither party intends to be bound and that the memo is not intended to be a contract. The same is true of minutes of negotiation meetings, as the parties can be held to have a contract for the points on which they have already agreed. Indeed, a memo of agreement or negotiations that is expressly made conditional on legal approval may be viewed as a contract on the premise that legal points not specifically approved by an organization’s lawyer may be clarified by default provisions in the law. Any letter of intent given as authorization to begin producing goods or the like certainly will be regarded as binding.
2.0 Nonbinding — If a letter of intent is to be nonbinding, it must include an explicit and clear statement to that effect, with the understanding that such a letter cannot be binding on one party and nonbinding on the other.
A letter of intent between the parties without authority to bind their organizations would typically be held as nonbinding if it contains a condition of approval by management or other authority. However, one must take care that the party truly does not have such authority and that there is no precedent of having treated prior, similar letters as binding, in which case the party may be considered to have “apparent authority.”
The best practice is to have the letter spell out, in simple language, whether the parties intend it to be binding