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Letters of Intent by jigordon
August 14, 2007, 1:54 pm
Filed under: contract terms, fees, IP Indemnity, license grant, NDA, negotiation, risk, Uncategorized, warranty

When was the last time that someone referred to you as the Order Prevention Department? Business folks tend to think that a contracts staff is only there to stop them from getting their next purchase. We know better, of course, but it doesn’t change the fact that we are constantly having to show value and purpose to our existence in the fact of adversity.

Recently, I was engaged in the beginning of a deal that would end with the purchase of a large technology system. The evaluation was done via an almost picture-perfect RFx process, spearheaded by a business owner who knows the value of a corporate contracts group and for whom I hold great respect. As the selection process neared conclusion, the business got anxious. They “needed” to start work immediately to meet their internal deadlines and thus wanted to do a…

… wait for it …

… bu, bum, baaaah…

Letter of Intent!

I wanted to cry. Here we were, humming along beautifully, and they wanted to derail it with a Letter of Intent (LoI).

Now, if you’ve never heard of a LoI, it is to a contract what a golf cart is to a car. In other words, it might eventually get you to your destination, but without the protection afforded by an enclosed vehicle. LoI’s are one of the banes of a contract negotiator’s existence – a poor excuse for a contract and they are sometimes seen as the easy way out to get a deal done quickly.

In the particular example above, the business wanted to use it as a bridge to get work started while we negotiated the full agreement. Since LoIs take at least some time, there’s a choice to devote some effort to the LoI rather than review the full agreement. Granted, the full contract will require MORE time, but I don’t think it outweighs the risks of the average LoI.

When confronted with a request to review a LoI (and when you can’t negotiate with the business to just forge ahead with the full agreement), then remember to at least lock down the following things:

1. Term. Place a limit on how long this interim agreement is going to last. The shorter the term, the less the risk.

2. Fee/Rate. Clearly state the rate/fees and how they will be calculated. A fixed fee is always best (and even better if that fee is $0.00). If you really want to protect yourself, include a cap on the total amount of money that can be expensed under the LoI. Remember always that a one-week engagement isn’t equal to only 40 hours – 2 resources = 80 hours, 3 resources = 120 hours. Multiply against your listed hourly rate and you can see “small” agreement add up quickly. Oh, and don’t forget about capping expenses, too.

3. License. If you’re getting access to software without a full license – WATCH OUT. All of the standard license issues still apply (IP indemnification and virii for example). Also remember that if for any reason the full agreement doesn’t get signed, it’s most likely that your license will terminate.

4. Services. Clarify ownership for anything created as a result of services performed. What happens if the full agreement isn’t completed? Do you lose ownership? How about work that includes your confidential information?

5. Warranty. Depending on how long the LoI lasts, or how any deliverables are created and delivered, you may need/desire a warranty for those deliverables.

6. Indemnification. As mentioned above, and for deliverables/services, too, you will want to be indemnified in the event that the vendor uses something they don’t have the right to use in performing the work. You will also want a general indemnification if the vendor is going to be onsite at your facilities in the interim term.

7. Confidentiality. Hopefully you’ve already completed a Non-Disclosure or Confidentiality Agreement with any vendor that you’re willing to use a LoI with – but if not, include your standard confidentiality language.

8. Termination. As with any other license or services agreement, include standard termination for breach language. Make sure you also retain the ability to terminate the LoI at any time, for any reason. It’s probably reasonable that you will have to pay for services performed up to the moment of termination, but don’t forget to tie it to ownership over work completed and paid for.

9. Governing Law. Fairly self-explanatory, but don’t forget to cover governing law. And remove jurisdictional statements, just like always.

Oh, and to make matters even worse, each of the terms you negotiate in the LoI may change in the full agreement, as the risk you (or the vendor) are willing to tolerate in a short-term agreement may be drastically different than the risk you (or they) are willing to take in the long run. The usual saving grace in all of this is that the vendor probably doesn’t want the LoI either – work together to make it palatable.

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