Letters of intent

A “letter of intent” is a letter, used in the construction industry, that is sent to try to get a project going before a full contract is signed up to, usually by a developer (or a consultant acting for a developer) to a contractor. Lawyers tend to discourage the use of them, and it should speak volumes when I say that the majority of my litigation cases involve either a letter of intent or an attempt at a home-made contract. A full contract usually reduces the scope for disagreements, and therefore reduces the scope for (often expensive) litigation.

I am always surprised when I find out that a multi-million pound development has progressed to an extremely late stage, and substantial sums expended and incurred, on the basis of what is often a two page letter. Apparently (according to HHJ Seymour QC in Tesco Stores v Costain Construction [2003]) many contractors believe that a letter of intent entitles them to be paid but does not expose them to any obligations, and therefore to any risk. I am afraid that really is a myth.

If a letter of intent contains obligations on the part of the developer (e.g. to pay) and on the part of the contractor (e.g. to design and/or construct something), and is sufficiently certain, it will usually be a binding contract (unless the letter is relatively clear that it is subject to contract). That means that the wording of the letter will be strictly enforced by the court, even if the parties had not thought about the wording that carefully. However, although those obligations will exist, it is unlikely that provision will have been made for a completion date, liquidated damages, limitation clauses, insurance obligations, design liabilities, variation procedures, or any of the other various matters that are often argued over (but could be resolved by a full contract).

A letter of intent was considered in Arcadis Consulting (UK) Limited v AMEC (BSC) Limited [2016] EWHC 2509. As is often the case, there were several rounds of correspondence, but Mr Justice Coulson found that a letter on 6 March 2002 (the first of two) was a letter of intent, which was accepted by conduct. The parties were, around that time, negotiating the full terms of the contract, including a Protocol Agreement, Terms and Conditions and a Design Scope and Deliverables document. However, the letter of intent said as follows:

Your work is to be carried out in accordance to the Protocol Agreement and Terms and Conditions associated that we are currently working under with yourselves, the Design Scope and Deliverables document…and your quotation.

The key phrase above is “your work is to be carried out in accordance to”, which is similar to other phrases often used in letters of intent, such as “you are to work in accordance with the JCT contract” or “your work shall be governed by the NEC contract”.

In this case, the terms and conditions contained a limit of liability clause. However, Mr Justice Coulson found that the terms and conditions were not incorporated, in part because of the wording of the letter of intent and in part because of other factors specific to this case. Harsh though it may seem, and even though the parties appeared to subsequently be in broad agreement as to the need to have a limit of liability clause, that was simply not incorporated. As was the case in Twintec v Volkerfitzpatrick [2014] EWHC 10, any primary obligations contained within the ancillary documents may well have been incorporated by a phrase similar to “in accordance with”, but secondary obligations, such as a limit of liability clause or dispute resolution clause, would not be.

With letters of intent, the reality is that all of the circumstances of the case have to be considered before any legal advice can be given as to their status. That is why cases often end up in litigation when letters of intent are involved. At the very least, signing up to a full contract gives certainty as to the terms of the contract. It also allows the parties to have in place a proper completion date, with liquidated damages in default, along with any other terms that they may consider to be appropriate.

We are always happy to advise on construction contracts. We can provide bespoke terms for most situations, or with a schedule of amendments to most of the common forms of construction contract (JCT, NEC, ICE, ACE, RICS, etc). We can also advise on proposed terms and negotiate on behalf of employers, contractors and sub-contractors before a project is commenced.