Letter of Commitment: When You Need One and Key Terms to Include

A letter of commitment can be useful when a deal is moving quickly but the full contract is not ready yet. The problem is that many business owners sign one without being clear on whether it is legally binding, who is actually committed, or what happens if the main deal never gets finalised. Common mistakes include treating a letter of commitment as “just a formality”, relying on verbal promises that are not written down, and agreeing to spend money before the document says who carries the risk.

If you are about to sign with a supplier, customer, investor, landlord, contractor or strategic partner, this guide explains what a letter of commitment means in New Zealand, when it can help, when it can create problems, and which terms deserve close attention before you sign. A short document can still create real obligations, so the wording matters more than many founders expect.

Overview

A letter of commitment records that one or both parties intend to move ahead on a proposed arrangement, often before the full agreement is signed. In New Zealand, the legal effect depends on the wording, the context, and whether the document shows a clear intention to create binding obligations.

• Whether the letter is intended to be legally binding, partly binding, or non-binding
• Exactly what each party is committing to do, and by when
• Any conditions that must be met before the deal proceeds
• Exclusivity, confidentiality, deposits, costs and termination rights
• Whether the letter is meant to be replaced by a fuller contract later
• What happens if negotiations stop or the final agreement is never signed

What Letter of Commitment Means For New Zealand Businesses

A letter of commitment is usually a short written document that records a serious intention to proceed with a transaction or business arrangement. It sits somewhere between early discussions and a full contract, but it is not a standard legal category with one fixed meaning.

In practice, people use the term for several different situations. A customer might sign a letter of commitment to confirm future volume orders. A business partner may use it to record a commitment to negotiate a longer agreement. A lender, investor or grant provider may ask for one to confirm proposed funding, subject to conditions. A landlord or outgoing tenant may request a commitment letter before more formal commercial lease documents are prepared.

The main point is simple: the label does not decide the legal outcome. A document called a letter of commitment can still be binding if the language shows that the parties intended it to create enforceable obligations.

How it differs from related documents

Founders often confuse a letter of commitment with a letter of intent, memorandum of understanding, heads of agreement, term sheet or offer letter. These documents overlap, but they are not always the same.

Some are mainly used to record commercial understanding while the lawyers draft the formal contract. Others are designed so that a few clauses are binding straight away, such as confidentiality, exclusivity or payment of due diligence costs. Another may be drafted as a short-form binding agreement because the parties want certainty immediately.

That means you should focus less on the title and more on the drafting. Before you rely on a verbal promise or accept the provider's standard terms, check what the document actually says about legal effect, timing and exit rights.

When businesses commonly use one

New Zealand businesses tend to use letters of commitment in moments where commercial momentum matters, but the parties are not ready for the final paperwork. That can happen when:

• a supplier wants comfort before reserving stock, production time or freight capacity
• a customer wants to signal serious purchasing intent before internal approvals are complete
• a contractor needs confirmation before ordering materials or booking subcontractors
• a prospective tenant or occupier wants to move forward while a lease is being negotiated
• an investor, lender or funding body wants to outline proposed support subject to conditions
• two businesses are exploring a strategic partnership and want limited early commitments in writing

Used carefully, a letter of commitment can help parties move forward without pretending every issue has been settled. Used badly, it can lock a business into obligations it did not mean to accept.

Can a letter of commitment be legally binding in New Zealand?

Yes, it can. New Zealand contract law looks at substance, not just headings. If the document contains clear promises, essential terms and language showing an intention to be legally bound, a court may treat it as enforceable, even if the parties expected to sign a longer agreement later.

Some letters are fully binding. Some are deliberately non-binding except for a few clauses. Some fall into an awkward middle ground where the wording is unclear, which is where disputes often begin.

This is why phrases such as “subject to contract”, “non-binding”, “binding only as to confidentiality and exclusivity”, or “the parties agree to enter into a formal agreement on these terms” need careful handling. Loose drafting can create uncertainty rather than flexibility.

Why founders use them anyway

The commercial reason is straightforward. A letter of commitment can create enough certainty to let work continue while more detailed terms are finalised.

That may be useful before you spend money on setup, before you sign a contract with downstream customers, or before you commit staff and resources. It can also help prove internal seriousness to directors, lenders or project stakeholders. The value is speed, but speed is exactly why legal ambiguity creeps in.

Legal Issues To Check Before You Sign

The safest approach is to decide first what this document is supposed to achieve, then draft only the commitments needed for that stage. If you sign before that is clear, you may create obligations that do not match the deal you think you are making.

Is it binding, non-binding, or partly binding?

This is the first issue to settle. The letter should state clearly whether:

• the whole document is legally binding
• the whole document is non-binding and only records current intentions
• only certain clauses are binding, such as confidentiality, exclusivity, governing law, costs, or dispute process

If the parties want only limited obligations now, say that expressly. If the intention is to bind the parties immediately on key commercial points, make that equally clear. Ambiguity here can undo the commercial purpose of the document.

What exactly is each party promising?

A commitment should be specific enough to understand what must happen next. Vague statements such as “the parties will work together” or “the supplier will support future requirements” can create argument without giving either side real certainty.

The document should identify the practical commitments, such as:

• minimum purchase volumes or indicative volumes
• delivery windows or performance timeframes
• resource allocation, reserved stock, or production capacity
• exclusivity periods
• pricing principles or how pricing will be agreed
• responsibility for due diligence, approvals or onboarding steps

Where figures are still provisional, say so. If quantities are estimates only, avoid wording that could be read as a guaranteed order commitment.

Are there conditions that must happen first?

Many letters of commitment are meant to apply only if certain things happen. Those conditions should be set out clearly so neither side assumes the deal is unconditional.

Common conditions include:

• board approval or other internal approval
• satisfactory due diligence
• finance approval or funding confirmation
• execution of a formal agreement
• landlord or third-party consent
• meeting technical, regulatory or site requirements

State who is responsible for satisfying each condition, the deadline, and what happens if it is not met.

Who pays costs before the full agreement is signed?

This is where founders often get caught. A supplier reserves stock, a contractor buys materials, or a tenant spends on plans and fit-out preparation, then the wider deal falls over.

The letter should spell out whether either party can incur costs in reliance on the document, whether those costs need pre-approval, and who carries them if the formal agreement is never signed. If no reimbursement will be available, say that directly.

Does the letter create exclusivity?

Exclusivity can be valuable, but it should not be implied. If one party is expected not to negotiate with competitors for a period, the scope and timing should be explicit.

Before you sign, check:

• how long the exclusivity period lasts
• whether it applies to all products or only a defined project
• whether there are milestones the other side must meet
• what happens if negotiations stall
• whether there is any compensation or break right

Without those details, exclusivity can leave a business tied up with no reliable outcome.

Are confidentiality and information use covered?

If the letter opens the door to sharing pricing, customer information, technical material, forecasts or other sensitive information, confidentiality terms matter. A short commitment letter often appears before a broader contract, which means your confidential information may be exposed at the stage where the legal protections are thinnest.

The document should cover what information is protected, who can access it, what it can be used for, and when it must be returned or destroyed. If personal information will be shared, think about your obligations under the Privacy Act 2020 as well, including any privacy notice or internal process you rely on. A commercial document does not remove the need to handle personal information lawfully and transparently.

What ends the arrangement?

Every letter of commitment should say when it expires or how it can end. If it stays silent, parties often assume different things.

Useful termination points include:

• a fixed expiry date
• termination on written notice
• automatic end if a condition is not met by a deadline
• automatic replacement when the formal contract is signed
• termination for material breach of a binding clause

You should also check which obligations survive termination, such as confidentiality, accrued payment obligations, return of property, or dispute resolution clauses.

Does the letter fit the wider transaction?

A letter of commitment should not contradict your draft main agreement, proposal, quote, purchase order or lease discussions. If several documents are in play, the order of priority matters.

One practical risk is that a later document says one thing and the letter says another. Another is that the letter accidentally locks in a point you planned to negotiate later. Before you sign, compare the documents side by side and decide which terms are final and which are still open.

Common Mistakes With Letter of Commitment

The biggest mistake is assuming a short document carries little legal risk. Short documents often create the hardest disputes because they leave too much unsaid while still sounding definite.

Treating the title as the answer

Many business owners think a “letter” must be informal and a “contract” must be formal. New Zealand law does not work that way. If the content looks contractual, the document may be enforced regardless of its name.

That is why changing the heading to “non-binding letter of commitment” is not enough if the body contains clear obligations, payment promises or fixed commitments.

Using inconsistent binding language

A common drafting problem is mixing phrases that point in opposite directions. For example, the letter may say it is “non-binding”, then later say the parties “agree to proceed on the following terms” or “must complete the transaction by” a certain date.

That kind of inconsistency creates room for argument. If only some clauses are intended to bind, separate them clearly and identify them precisely.

Leaving out key commercial detail

Founders often keep the document short by omitting detail they think can be sorted later. Sometimes that is fine. Sometimes it means the letter is too uncertain to achieve its purpose, or worse, certain enough to create a dispute but not clear enough to resolve it.

Watch for gaps around:

• price or pricing method
• scope of goods or services
• timing and milestones
• conditions and approvals
• liability for pre-contract costs
• what happens if negotiations stop

If the missing detail matters commercially, it probably matters legally too.

Relying on verbal side promises

This happens often in supplier and contractor deals. The signed letter says one thing, but one side says, “Don’t worry, we won’t hold you to that if the budget changes” or “the exclusivity is only there to keep our head office happy.”

Before you sign, ask for those statements to be put in writing. If they are not written down, they are much harder to rely on later.

Committing too early on exclusivity or spend

A letter of commitment can feel like a low-risk way to keep a deal moving, so businesses sometimes agree to stop talking to alternatives or start spending money before the main contract is settled. That can remove your leverage at the exact point when the big terms still need negotiation.

If the other side wants exclusivity, tie it to a short period and measurable progress. If early spend is required, set approvals, caps, reimbursement rules and ownership of work product.

Ignoring sector-specific issues

Some transactions need extra care because the commitment sits alongside a regulated or higher-risk commercial area. For example, a commitment around supply arrangements may interact with product claims and Fair Trading Act obligations if marketing promises are made too early. A commitment involving customer data can raise data protection and privacy issues. A property-related commitment may need consistency with lease terms and landlord consent requirements.

The letter itself may be short, but it should still fit the broader legal setting of the deal.

Failing to identify the correct party

This sounds basic, but it causes real problems. Check whether the signatory is the actual legal entity you expect to deal with, such as a New Zealand company, overseas parent, trust-related entity, or individual. If a founder signs personally when the business expected a company commitment, the risk profile changes immediately.

Before you sign, confirm the full legal name, company number if relevant, and whether the person signing has authority. A good commercial promise is far less useful if it comes from the wrong party.

FAQs

Is a letter of commitment the same as a contract?

Not always. Some letters of commitment are binding contracts, some are non-binding, and some are partly binding. The effect depends on the wording, the deal context, and whether the document shows an intention to create legal obligations.

When should a business use a letter of commitment instead of a full agreement?

It can be useful when the parties need a short document to record limited commitments while a fuller agreement is still being negotiated. It works best where the scope is clear and both sides understand exactly which parts are binding now and which are not.

Can I pull out after signing a letter of commitment?

Maybe, but only if the document allows it or if conditions are not met. If the letter is binding, pulling out may expose your business to claims for breach or wasted costs. Check the termination clause, expiry date and any conditions before assuming you can walk away.

What terms should be included in a letter of commitment?

The key terms usually include the parties, the purpose of the arrangement, the commitments being made, timing, conditions, confidentiality, exclusivity if any, costs, legal status, termination and what happens when the full agreement is signed.

Do I need a lawyer to review a letter of commitment?

If the deal matters commercially, legal review is sensible. A short document can create real obligations around exclusivity, payment, confidentiality, supply, property, or negotiation conduct, and those points are easier to fix before you sign than after a dispute starts.

Key Takeaways

• A letter of commitment can be legally binding in New Zealand, even if it is short and even if the parties expect a fuller agreement later.
• The title does not decide the legal effect, the wording and context do.
• Before you sign, be clear on whether the document is binding, non-binding, or only partly binding.
• Key terms usually include scope, conditions, timing, costs, exclusivity, confidentiality, termination and replacement by a formal agreement.
• The main risk is assuming the document is only a formality when it actually creates enforceable obligations or leaves expensive uncertainty.
• It is worth reviewing the letter carefully before you rely on a verbal promise, spend money, or accept the provider's standard terms.

If you want help with binding wording, exclusivity clauses, confidentiality terms, and termination rights, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.