Letters Of Intent

Have you been given a letter of intent? Does an employer or main contractor want you to start work before you’ve agreed and finalised a formal contract for the project?

Letters of intent can seem commercially attractive. They allow you to start planning and even start working on a project. But if you’re not careful, you could find you’re signing up for a whole host of risks.

For a confidential and free discussion, call us today on 01908 414990. Alternatively, email us at Hello@altion-law.co.uk or complete our Free Enquiry Form and we will call you back.

What Is A Letter Of Intent?

“Let’s agree to agree.” That’s essentially what a letter of intent signals. Acting as a stepping stone to a full contract, it documents an agreement to enter into a contract.

So far, so straightforward. What’s less clear is the legal effect of working under a letter of intent. Is it a binding agreement or not? In other words, is it actually an enforceable contract?

The short answer: it depends.

More often than not, a letter of intent creates a legally binding contract. Judges and adjudicators generally dislike finding that there is no contract. But it all depends on the form and wording of the letter of intent, as well as the parties’ conduct.

Why Might A Letter Of Intent Seem Attractive?

For contractors or subcontractors – it can give you some comfort that you will be paid for work you carry out while the details of the full contract are still being hammered out.

For employers – it means you don’t have to wait for the contract to be finalised and signed before your contractor makes a start. This could help to reduce your borrowing costs or accelerate the completion date and when you can begin earning an income from the project.

What Are The Risks?

  1. A lack of certainty. If a letter of intent contains vague language, this can easily lead to misunderstanding. From there, it’s only a short distance to a full-blown dispute. So it’s vital to get clarity on the specific obligations on each party.
  2. A letter of intent doesn’t necessarily guarantee you’ll be given the full scope of work or a final contract for the project. This is a key risk, particularly for subcontractors and sub-subcontractors. Make sure you understand the scope of the project, your role, and the terms under which the letter of intent can be terminated.
  3. Caps: on the scope of work, period of works, or the upper amount that is payable. If you’re not careful, you could find yourself in a position where you have effectively carried out a large chunk of work for free.
  4. A letter of intent could weaken your bargaining power. If you have already signed up to less than favourable conditions, your employer or main contractor might be less motivated to negotiate a final contract on better terms for you.

Should I Agree To A Letter Of Intent?

There are two watchwords to have at the forefront of your mind if you want to use, or are asked to use, a letter of intent:

Be careful.

What you don’t want to do is undertake a project under a letter of intent and later discover that the contractual position was not what you thought it was.

The best time to negotiate a contract is before you start any work. However, if a letter of intent is unavoidable, make sure it is as favourable as possible. Pay close attention to the details. Read it as carefully as you would any contract or formal document.

Here are some key questions to consider:

  • Is the scope of works sufficiently clear?
  • How will changes be handled?
  • What are the payment terms? Are they acceptable?
  • Are there any caps limiting the scope of works, period of work, or amount payable? Are they realistic? Will they cover your potential costs?
  • Are the insurance obligations clear?
  • Under what terms can the letter of intent be terminated?

Be aware, however, that this is not intended as a comprehensive checklist. Each letter of intent will have its own idiosyncrasies. That’s why it’s sensible to seek expert legal advice from specialist construction solicitors before agreeing to a letter of intent.

Altion Law are specialists in advising and representing parties on commercial construction contracts, claims and disputes.

For a confidential and free discussion, call us today on 01908 414990. Alternatively, email us at Hello@altion-law.co.uk or complete our Free Enquiry Form and we will call you back.