March 8, 2022
Congratulations! You’ve just landed a brand-new client, what now?
It’s always best to agree on some basic contractual terms which govern the deal up front, for example:
- What are your obligations to each other going to be?
- How much does your customer need to pay you, and when?
- What will happen if your customer doesn’t pay you on time?
And so on.
This is often done by both parties working together to negotiate a long-form agreement or standard set of terms and conditions, which can sometimes take time.
While this is the best option for complex and/or high-risk deals, a Letter of Agreement (aka a LoA) is a great alternative for smaller low risk deals which need to be agreed quickly and where you don’t require the same level of legal protection.
What is a Letter of Agreement?
- A LoA is a letter drafted by one party to another party. It doesn’t matter which party drafts the letter, only that it’s signed by both parties. Upon signature, the letter becomes binding on both parties. This is now a valid contract.
- The LoA is only intended to cover the basic details of your deal, therefore in nature it is a much simpler and shorter document to agree with your client.
- It can work alongside other documents, such as an order form and/or Statement of Work (SoW), or you can use it on its own. It’s completely up to you!
10 essentials in a Letter of Agreement
Our Commercial Legal Team has whittled down their top tips when drafting a Letter of Agreement.
1. Names, dates, addresses
Given that this is a Letter of Agreement, you should ensure it’s set out like a letter.
Your client’s name and address should be at the top, as should the date you’re sending your letter, and address this to your contact at the client’s company.
Don’t forget to include the usual letter signoff at the end of your document and allow space for your client to countersign.
The opening paragraph should reference the deal and the background to the letter being sent. You’ll then need to get into the meat of the terms and conditions. This can be in simple paragraphs.
Psst... Enjoying this article... or need help drafting your Letter of Agreement?
Take a look at our dedicated Letter of Agreement template page, where we're now offering free resources to make drafting LoAs easier. You can download a key facts document and view a sample table of contents.
You’ll need to describe each parties’ obligations. Put simply, the supplier shall provide the services and/or goods the client will pay for the service.
4. Price and Payment Terms
You should set out how your business intends to charge the client for the services:
Will it be fixed price? Or will you charge on a time and materials basis? You’ll need to ensure this is clearly set out.
Don’t forget if you’ll be billing on a time and material basis, you’ll need to add your daily rate card and whether expenses will be payable on top of this.
When will the client be expected to pay you? i.e., will payment be upfront or within 30 days of your invoice.
What happens if the client doesn’t pay?
You should consider what you want to happen if the client fails to pay on time i.e. do you want to be able to suspend the services and/or charge them interest on the overdue amount?
5. Confidential Information
The deal might only be a short one, but in the process both parties could become privy to confidential information. “Loose lips sink ships” is the old saying.
Okay, you might not be losing ships - but you could lose the edge in the market if your IP or company secrets become public knowledge.
We always recommend adding a clause to ensure protection for both party’s confidential information.
6. Term and Termination
You’ll need to set out how long your relationship will be in place for, or at least the length of this particular deal.
For example, if the LOA is for some consultancy work that you’ll doing for the next 3 months, you can add in a term of 3 months.
If you’re not sure what the term will be, you can agree in writing that the contract will stay in place until it’s terminated.
Note: If this is what you decide to do, you’ll need to include termination rights too!
7. Termination Fees
If your client wishes to cancel the project, or tries to reschedule the dates a couple of days before kick-off, you could be out of pocket. So, what should you do? Well, as a starter you could ensure sufficient termination notice periods and could even agree to liquidated damages, depending on the value of the agreement (if you want to be paid for late termination – see our liquidated damages blog for further details).
Loss and damage are two words no one likes to hear in a business relationship. But we all know sometimes things go wrong.
Who is liable? You can use the LOA to protect both parties by setting out your liability to each other, where you aren’t liable and where you are you may also want to consider “capping” your liability to a certain figure.
Think of this as risk vs reward, although you’ll getting a reward from the deal, there may also be risks involved and you may not want to be on the hook for all of these!
Note: Just be aware, for certain situations, legally you cannot cap your liability.
9. Data Protection
As you may remember, in 2018 the EU was introduced to a new friend GDPR (General Data Protection Regulation).
GDPR is now incorporated into UK law and, since leaving the EU, it is still retained in our laws. With it came along lots of new obligations for businesses who handle any data that can identify a human.
It means if personal data will be processed by either of you in connection with the deal, you’ll need to add in certain data protection language.
Any queries, head to the ICOs (information Commissioners Office) website or give Law 365 a call!
10. Governing Law and Jurisdiction
You’ll need to set out what law the letter of agreement is to be governed by and what courts can settle a claim i.e., English law and the English courts.
Need help drafting your Letter of Agreement?
Or would you like to find out more about LoAs, we'd love to hear from you! On our dedicated Letter of Agreement template page, we're now offering free resources to make drafting LoAs easier.
Download a key facts document which speaks in more detail about what to consider and view a "sample table of contents".
Do you have a legal question for us?
Whether you are just getting started, need a template package or looking for legal help as an annual subscription, we are here to help with any questions you may have.
Our mission is to help you succeed, with less risk.