Universities
Letters of Intent - Avoiding Common Pitfalls
Letters of Intent are commonly used within the construction industry, however they are
widely misunderstood in their terms and effects. The aim of this summary is to provide a
guide to the most common pitfalls so that you can make Letters of Intent work for you.
What is a Letter of Intent?
A Letter of Intent can come in many forms but it is essentially a communication expressing
an intention to enter a contract at a future date. It could be:1.
a non-binding statement of future intention of both parties;
2.
an ‘if’ contract which creates binding contractual rights; or
3.
a complete contract.
When should I use a Letter of Intent?
A Letter of Intent is usually used where the Issuer wishes to have some work commenced by
the Contractor before a formal contract has been agreed and signed up to by the parties. It
can be an expression of a current intention by one or both parties to enter into a future
contract ‘if’ certain conditions are met. For example, the Employer (Issuer) requests that the
Contractor carries out some work and if the Contractor does so it will receive remuneration
from the Issuer. Alternatively it could be a non-binding statement of future intentions. For
example, a Letter of Intent may be used to reassure a Contractor that it is likely to be
favoured with the award of a contract and on this basis the Contractor may be willing to
undertake limited preparatory work at its own risk.
A Letter of Intent should however only be used where there are good reasons to start work in
advance of the finalisation of all of the contract documents (cases of commercial urgency)
and should be used merely as a safeguard of legal rights whilst the contract documents are
being finalised.
The Letter of Intent will need to be properly drafted and should never be seen as a substitute
for a building contract.
What criteria must be met by a Letter of Intent in order for it to be binding until the
main contract is signed up?
The criteria to be met are the same as for any binding legal contract, namely:1.
certainty as to key terms;
2.
there must be consideration;
3.
both parties must have a mutual intention to enter into a binding legal contract.
Tips on drafting letters of Intent - Do's and Don'ts
DO:
z
Clearly identify the scope of the works.
Tip - consider referring to tender documents which describe the scope of the works.
z
Set out the matters to be resolved for the main contract to be entered into.
Tip - eg "the following matters have yet to be resolved:[insert matters to be resolved]
z
Make it clear that the Letter of Intent is intended to give rise only to an interim agreement pending the negotiation of the main
contract and that neither party intends to be bound by the main contract until the written document is executed by each of
them.
Tip - Set this position out following the list suggested above with use of the words "once these matters are agreed it is our intention
that they will be contained in a formal written contract".
z
Set a limit on the amount to be paid to the Contractor.
Tip - this could be done by a provision stating that the Issuer promises to pay the Contractor's reasonably incurred expenditure up to a
maximum limit of [£X].
z
Make mention of VAT.
Tip - failure to do this can lead to a dispute on whether the sum is inclusive or exclusive of VAT.
z
State that the Contractor is not entitled to any further payment by way of quantum meruit or anything else.
Tip - this will prevent a parallel claim in respect of reasonable remuneration for goods supplied or services rendered in addition to the
amount in the Letter of Intent and hence avoid a double recovery by the Contractor.
z
Include a method of dispute resolution within the letter.
Tip - The Letter of Intent may fall within the provisions of the Housing Grants, Construction and Regeneration Act 1996 Part II (the
"Act") and therefore a dispute arising under the Letter of Intent will be referable to adjudication should either party wish to do so.
z
Make it clear who is to be the instruction giver in relation to the work to be carried out.
Tip - this avoids later disputes between Issuer and Contractor as to whether work should or should not have been carried out and
hence whether the Issuer is obliged to pay for it.
z
Make it clear that once the intended contract is concluded it will apply retrospectively.
Tip -it is particularly important to say that any payments under the Letter of Intent will be treated as payment on account of
obligations in the main contract once this comes into force. This will help to prevent double claims for payment in respect of work
carried out.
z
Make sure the Letter of Intent is actually issued by the Issuer.
Tip - it is not appropriate for a Letter of Intent to be issued by a Project Manager because they may not have the authority to
contractually bind the Issuer which will lead to problems in the long term.
DON'T:
z
See a Letter of Intent as a substitute for a properly drafted contract.
Tip - if you rely only on a Letter of Intent you may find that it does not contain adequate terms for your protection and may leave many
issues unresolved. Finalise the full contract as quickly as possible. Disputes often arise on incomplete unsigned documentation and
your bargaining power is likely to reduce the longer a Contractor is on site without the main contract.
z
Have a Letter of Intent which incorporates all the terms of the contract.
Tip - if on the face of it a Letter of Intent appears to incorporate all the terms of the contract the Court may decide that it is in fact a
binding contract. Just because a document is headed Letter of Intent" it does not mean to say that the Court will not find that a formal
contract has been entered into.
z
Forget to send a copy of the Letter of Intent to the other party for signature and return.
Tip - remember, both parties need to accept the terms.
z
Forget that the limitation period for liability for work carried out under a Letter of Intent will only be 6 years.
Tip - in order to obtain 12 year protection for breaches of contract for defective work it is necessary to enter into a contract which is
executed as a deed. Given the temporary nature of the Letter of Intent this should be dealt with under the main contract. Most
standard forms of building contract have the option to execute them as a deed.
z
Forget to formalise the contractual relationship.
Tip - If you and the other party to a Letter of Intent continue to conduct yourselves in the same way once the letter has expired the
letter may be construed as continuing to be in effect. Make clear diary notes of the dates when any Letters of Intent expire and ensure
the relationship is formalised by this date, preferably by entering into the main contract.
z
Go beyond the terms of the Letter of Intent, Courts have found that parties have varied the terms of a contract simply by their
actions.
Tip - If additional terms are agreed ensure the Letter of Intent is kept up to date.
z
Forget that whether you are a Contractor or an Issuer under a Letter of Intent then you are at risk if the Letter of Intent is not
clearly drafted.
If you are in any doubt as to the terms of any letter of intent, regardless of whether you are the issuer or the contractor, take
legal advice.
Our Experience
The Construction and Engineering Group of Pinsent Masons handles all aspects of Letters of Intent, including drafting and reviewing
the terms of Letters of Intent, advising Suppliers and Issuers on Letters of Intent and dealing with disputes where Letters of Intent
are used.
Our construction lawyers have provided advice to the following universities:
Pinsent Masons National Universities Team
The Pinsent Masons National Universities Team numbers over 80 lawyers and includes many who are nationally known technical
specialists in their own fields. The team is lead by Nicola Hart who is recognised as a leading expert in the field and highly rated in
the independent published directories.
If you would like to further information on Letters of Intent or the services we provide in relation to UK construction and
engineering please contact either of the following:
Nicola Hart
Partner
National Head of Universities Team
Dean Larder
Partner
UK Construction and Engineering
T: 0121 260 4050
M: 07717 335606
E: [email protected]
T: 0113 294 5183
M: 07810 556749
E: [email protected]
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