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Last edited 07 Feb 2022

Letter of intent

1 Introduction
2 Content
3 Process after a letter of intent
4 Legal and negotiating position
5 Other case law
6 Related articles on Designing Buildings Wiki

[edit] Introduction

A letter of intent is a document expressing an intention to enter into a contract at a future date but creates no contractual relationship until that future contract has been entered into. A letter of intent is not an 'agreement to agree'.

It is important to bear in mind that 'letter of intent' is a term of commercial convenience and not a term having a substantive legal meaning, as for example 'subject to contract’. Each letter of intent must be construed on its own particular meaning.

It is suggested that the legal effect of a letter of intent may fall into one or more of the following categories:

The expression of an intention to enter into a contract at a future date which does not give rise to any legal obligation, whether in contract or quasi ex-contractu (as if from a contract) on a quantum meruit (a reasonable amount for labour and materials, payable even in the absence of an enforceable agreement); or
The expression of an intention to enter into a contract at a future date which does not give rise to any liability in contract but does not exclude or negate a right to recover reasonable expenditure on a quantum meruit; or
The creation of a conditional or ancillary contractual obligation which may, but not necessarily will, be subsumed by a wider contractual obligation upon formal contracts being exchanged; or
A legally binding executory contract in that the letter of intent is an offer capable of being accepted or is the acceptance of an offer.

Letters of intent are most commonly sent at a time when it is anticipated that the recipient will be incurring costs and overheads. They can be used as an interim arrangement to mobilise construction prior to a formal contract being executed, but they should never be seen as an alternative to a full contract and should place a limit on expenditure and the client’s liability prior to the contract being put in place.

For a letter of intent to be binding, there must be the three essential elements of a contract; agreement, intention and consideration. For more information see: Essentials of a contract

[edit] Content

A comprehensive letter of intent should address the following:

Client authorisation to the contract administrator to represent them.
Acceptance of the contractor’s offer and definition of the project.
The agreed contract sum.
Reference to the tender documents and subsequent amendments (with dates).
Instruction to proceed on a certain date.
Site possession date.
Contract completion date (including details of any phases).
A full description of the proposed form of contract, including warranties and performance bonds.
A fall-back date for signing the contract (this is important, as beyond a certain time in the progress of the works it may no longer be in the interests of the contractor to sign the contract).
Direction as to whether the contract will be executed by Deed, under seal or under-hand.
Restriction of the work authorised by the letter of intent, by proceeding with which the contractor has fully accepted the terms of the letter of intent.
Terms and provisions for cancelling the letter and determining the works at any time prior to signing the full contract - specifically, the terms will limit the client’s liability for costs and exclude claims for loss of profit, opportunity, good will, indirect or consequential losses.
Provision for the contractor to have access to the site under licence only, with no (tenancy) rights to possession and limited rights described in a separate licence that sets out conditions and the licence period.
Client and agents access provisions during the licence.
Insurance provisions and indemnification.
Agreement that there are no rights to assign the works.
Disputes resolution procedures.
Liquidated and ascertained damages to be applied to late completion.

[edit] Process after a letter of intent

Both parties should agree a formal contract as a matter of urgency.
Both parties should agree key dates and get regular, perhaps weekly cost updates to ensure limitation periods and monetary caps set out in the letter of intent are not exceeded.
Employers should not allow work to continue when a letter of intent has expired.
Contractors should not incur any costs in excess of any financial caps stated in the letter of intent without getting the employers agreement before doing so.

[edit] Legal and negotiating position

In July 2012, a legal judgement relating to letters of intent was made in the case of Ampleforth Abbey Trust v Turner & Townsend Project Management.

Turner & Townsend were appointed as project managers for a number of projects at Ampleforth College. On the advice of Turner & Townsend, the contractor, Kier Northern, was appointed on the basis of a letter of intent to allow an early start on site. In the event, 8 letters of intent were written and the contract itself, despite being substantially agreed, was never signed.

The contractor was four months late in completing the works, but as there was no contract in place, the settlement that was reached was not as favourable for Ampleforth as it might have been. Ampleforth began proceedings for professional negligence against Turner & Townsend. The judge awarded damages to Ampleforth on a ‘loss of chance’ basis because the letter of intent failed to make provision for liquidated and ascertained damages, although such a provision was set out in the proposed contract.

In essence the advice for clients is to avoid letters of intent because they do not cover all the eventualities set out in a standard contract. They also reduce the pressure for a contractor to sign a more comprehensive set of obligations and allow the contractor an opportunity for back-negotiation from a position of strength, for example, if ground works have thrown up unforeseen risks.

NB: Tender documentation should set out proposed contract documentation and terms so that there is no reason for agreement of the contract to be delayed.

[edit] Other case law

A letter of intent is to be distinguished from a provisional contract. This distinction was considered in the case of Hall & Tawse South Ltd v Ivory Gate Ltd. Judge Thornton QC described the comparison in the following terms:

'A letter of intent is usually an [sic] unilateral assurance intended to have contractual effect if acted upon, whereby reasonable expenditure reasonably incurred in reliance upon such a letter will be reimbursed. Such a letter places no obligation upon the recipient to act upon it and there is usually no obligation to continue with the work or to undertake any defined parcel of work, the recipient being free to stop work at any time.

'The effect of such a letter is to promise reasonable reimbursement if the recipient does act upon it. However, the letter in question (in the instant case) ... is one which imposes obligations on both parties. It requires the plaintiff to commence the works, being a defined package of work and contract administration. The plaintiff had an option of whether to start or not but, having started, the plaintiff was under an obligation to continue with the works and not to stop, unless the defendant appointed another contractor or gave notice abandoning the work or the contract was superseded by one of the two successor contracts envisaged by the letter. I propose, therefore, to refer to this contract as "the provisional contract".’

In the case of OTM Limited v Hydranautics (1981) the court found that OTM's telex stating '…it is our intention to place an order for one chain tensioner. A purchase order will be prepared in the near future but you are directed to proceed with the tensioner fabrication on the basis of this telex…’, was a letter of intent and did not constitute an acceptance of an offer.

In contrast to OTM, the court found there was a binding contract in Wilson Smithett & Cape (Sugar) Ltd v Bangladesh Sugar & Foods Industries Corporation.

The plaintiffs who were sugar merchants responded by a tender to an invitation sent by the defendants, a nationalised Bangladeshi Corporation. The tender was for the sale of 10,000 tons of sugar cane. The plaintiffs were the second lowest bidder. The Bangladeshi Government decided to import a further 10,000 tons and the defendants were instructed to place an order with the second lowest tenderer, i.e. the plaintiffs, if they were agreeable to matching the successful tenderer's bid.

Negotiations were conducted between the plaintiffs and the defendant; eventually the plaintiffs sent to the defendant a letter of offer, which was to remain open until 2 pm local Dacca time on 12 June 1991. The same day the defendants issued a letter of intent, which stated:

'We are pleased to issue this letter of intent to you for the supply of the following materials ... all other terms and conditions as per your ... offer dated June 12th .. ‘

The defendants decided not to proceed with their purchase and they contended that their letter of 12 June was nothing more than an expression of a future intent to enter into a contract. The court rejected this submission and held that the letter, although it used the phrase ‘letter of intent', was nevertheless intended to have a contractual significance and effect; accordingly there was a binding contract between the parties.

Similarly, in Turriff Construction Ltd v Regalia Knitting Mills Ltd the court held that a letter of intent had a contractual effect.

The concept of 'ancillary contract' or 'if contract' was considered in the case of British Steel Corporation v Cleveland Bridge & Engineering Company where the court held that a letter of intent had no contractual effect, as the effect of the material letter was to ask the recipient, British Steel, to proceed immediately with the work pending the preparation and issuing of a form of sub-contract, being a document which was still in the state of negotiation not least on the issues of price, delivery dates and applicable terms and conditions. Of an 'if contract' Goff J stated:

'As a matter of analysis the contract (if any) which may come into existence following a letter of intent may take one of two forms: either there may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other; or there may be what is sometimes called an "if" contract, i.e. a contract under which A requests B to carry out a certain performance and promises B that, if he does so, he will receive a certain performance in return, usually remuneration for his performance. The latter transaction is really no more than a standing offer which, if acted upon before it lapses or is lawfully withdrawn, will result in a binding contract.'

The possibility of an 'if’ contract was also considered, but rejected, by the court in A. Monk Construction Limited v. Norwich Union Life Insurance Society.

[edit] Related articles on Designing Buildings Wiki

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Comments

To join this debate, click 'Add a comment' above and add your thoughts at the bottom of the discussion.

I disagree with the content for your proposed letter of intent. It muddies:

mini-contract for preparatory works
heads of terms for proposed full contract
fall-back position in case the full contract is not signed and the works continue

In reality the courts have said (eg Hart v Fidler) that you only need four essentials for a letter of intent and those should relate to the preparatory works and not the project.

The risk is that the letter is never terminated, the full contract is not signed and nobody knows what terms, procedures and remedies apply to the works carried out.

I have some sympathy with this view but do not entirely agree.

The article makes it clear LOI’s are not a substitute for a contract and cannot be made into an agreement to agree. The reason for their existence is the tedious process of getting legal documents of substance first of all agreed, then authorised by the appropriate personnel and then signed. The contract also includes the documents used for tendering and post tender negotiation material. It literally can take months during which frustrated project management on both client and contracting sides committed to deadlines want to get on with the project. So LOI’s are an imperfect expedient to buy time which will always attract criticism from the legal profession.

Hart V Fidler in essence was focusing on the status of an adjudicator rather than the adequacy of a LOI. The LOI in question limited the work to a value of £20,000 thereby placing a limitation on scope. A second letter, extending the validity of the letter two weeks beyond the initial backstop date for substituting a signed contract for the LOI, lifted the maximum value cap without defining the scope of work. The judge observed that price, programme and scope were essentials to a building agreement and in the circumstances the scope should have been properly defined. The reason for inserting the type of contract proposed is to prevent the parties trying to re-negotiate standard terms or change the contract to be used thereby lessening opportunity for prevarication and delay to signing. It is not so its standard clauses can be invoked in the event it does not get signed. The Ampleforth case is a stark warning to those happy rely on an LOI in lieu of a proper contract.

An LOI is merely a framework and temporary agreement. As such it outlines the work, the standard contract to be used in substitution and sets out reimbursement until such time the contract is signed.

A mini contract for preparatory works is a OK for demolition, site preparation in redevelopment but has less use in fast fit out projects. Furthermore it does not obviate the delay in getting the legals and accompanying documents sorted in time to match the project start date.

Putting the items listed in the article in a LOI is important to prevent misunderstanding.

Letters of intent, as the comments note, are definitely an imperfect expedient or contractual "half -way house" (Mosey's words). It should always be treated as a temporary contract for pre-contract works and services, which should be clearly identified and not left open to interpretation.

However, the cases have shown that the more content the letter of intent contains, the harder it is for (a) the partners to understand what its purpose is and what it means for them (b) the lawyers to advise on the same (c) the administrators to implement the terms and (d) the courts to decipher when there is a dispute.

Heads of terms, ie what has been agreed (standard form, works documents) and what still needs should be set out in a separate schedule or document. As stated, this prevents the partners re-negotiating what has already been agreed. But by separating the content it avoids the risk of the letter of intent accepting the contractor's tender and prevents arguments like those in Twintec v Volkerfitzpatrick about which terms in the main contract apply to the letter of intent works.

The limits in letters of intent have largely (except in two cases) been found to be ineffective in limiting the employer's liability for works carried out by the contractor. Any employer who believes they will not have to pay for works carried out beyond the scope of the letter of intent is mistaken.

Although letters of intent are used globally, recent research has shown that the partners, courts and lawyers do not fully understand them. The only safe route is a clear contract for small scale works which is rapidly followed by a full contract for the project. This will help the partners achieve the project objectives and avoid disputes.

The problems that cause delay to contract signing are:

Agreement as to what contract documents are to accompany the contract.
Written clarification to verbal negotiations that took place after receipt of tenders which often needs the support of subcontractors prior to main contractor agreement.
Higher authority and in-house or external lawyers sign off by both parties to the contract.
Resolution of tender qualifications inserted in the contractor's tender.
A tendency to try and include any amendments to the scope that have occurred between the issue of tender information and the current start on site. The perceived advantage to the client is that such amendments are priced when there remains some negotiating leverage.
The logistics of printing and counter signing sets of a very large batch of documents.

This can take easily three months to sort out on a large project. It is rare for contract conditions already provided with tender information to be the cause of delay or dispute. I am not sure how agreeing Heads of Terms assists any of the above problems. Three months can take the project well beyond preparatory or small scale works. Foundation and drainage works may be undertaken and it would be unwise to split liability for this under a separate contract.