To what extent does a letter of intent constitute a binding contract with regard to a superyacht new build?

(Article published by The Superyacht Group, The Superyacht Report ISSUE 176)

Letters of Intent are often cited by various industry factions – shipyards, new build and refit, brokers and charterers, as well as the many other service and product providers – to indicate that the elusive first contract is just around the corner. Superyacht Group ask some of the industry’s top lawyers to what extent a Letter of Intent constitutes a binding contract with regard to a Superyacht new build.

Thomas Cooper Yacht team member, Grant Eldred contributed to the Superyacht Group editorial on Intents and Purpose. The article below is published with their kind permission.

Letters of Intent (LOIs) for Superyacht new builds are often believed to be moral (rather than legal) commitments only. A mere agreement to negotiate in good faith is generally unenforceable in English law. The absence of legal cases enforcing LOI terms is often cited as evidence that this is the case.

However, negotiations and settlements between yards and buyers are frequently driven and dictated by what the parties believe (or are advised) they have legally committed to (in the LOI or elsewhere). Even if the LOI is not ‘as a whole’ binding, the parties can have (whether intentionally or not) bound themselves to parts of it. For example, under English law (which may or may not be applicable) if there is (i) offer and unconditional acceptance; (ii) an intention to create legal relations; and (iii) consideration, aspects of the LOI may well be legally binding.

For example, this may include an obligation to negotiate or to build: if there is certainty as to price, and what the builder is building and the buyer is buying, the LOI may be getting dangerously close to a contract. This is likely to be more of an issue with a repeat build than a bespoke new build, but if price and detailed specifications and terms are referred to, the LOI may be more of a commitment than one party intends. Also, statements made fraudulently or negligently in the LOI may well give rise to a liability for damages in tort even if the LOI is not contractually binding. For example, a yard that does not have the facilities or capacity to build a vessel should not state that it has.

Then there is ‘lockout’. While an undertaking to negotiate is not normally binding, an agreement not to negotiate with other third parties for a period of time is often enforceable. This is the element of LOIs that we most regularly seek to enforce on behalf of yards or buyers. If the parties (or either one of them) want an LOI (or any part of it, e.g. ‘lockout’ provisions) to be legally binding, they should say so. Equally, and probably more importantly, if they don’t want it to be legally binding, they should also say so. Neither party benefits from the uncertainty of not doing so.

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About the contributor

  • Grant Eldred Partner

    Grant is a partner and the head of our Finance Group. He specialises in banking law including bilateral and syndicated secured and unsecured lending, trade finance and banking regulation and compliance.

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