Parties involved in a construction project are often under pressure to start work as soon as possible, sometimes before they have had an opportunity to put a contract in place. As a result, businesses working together on a project sometimes use ‘letters of intent’ to outline their intentions until they can conclude a formal agreement. Letters of intent are not formal legal instruments in the way contracts are, so their use can cause significant uncertainty. A question commonly asked by our construction clients is, ‘Is a letter of intent legally binding UK?’

The answer is it depends on the wording and circumstances. Here, our specialist construction team explains what letters of intent are and when they are binding on the parties.

 

For a confidential 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?

 A letter of intent is a document signed by parties involved in a construction project indicating their intention to enter into a full contract in the near future. Letters of intent allow the parties to commence work on the project without having to wait until the formal contract has been finalised.

There are no legal requirements governing what you should include in a letter of intent. However, the form of your letter can have far-reaching consequences, so it is advisable to take legal advice before entering into one. For example, you should ensure that the terms of your letter of agreement do not go further than your final contract will, and include a dispute resolution clause that explains how any dispute should be addressed.

 

Is a Letter Of Intent legally binding in the UK?

 Unfortunately, there is no clear-cut answer to this question; everything depends on the terms of the specific letter of intent and the circumstances. Some letters of intent are treated as ‘interim contracts’ that are binding on the parties. Others are treated merely as ‘letters of comfort’ and do not place any contractual obligations on the parties.

 

  • When is a letter of intent an interim contract?

 A letter of intent can be considered an interim contract that is binding on the parties when it includes an agreement over key contract terms and the parties perform their obligations, even though it has not been formally executed as a contract. The Court has ruled that a letter of intent is binding on the parties even though they had marked it ‘subject to contract’ because they had acted like they were in a contractual relationship, for example, by undertaking work and making payments.

 

  • When is a letter of intent a letter of comfort?

 A letter of comfort is provided by the parties involved in a construction project as reassurance to the others that they intend to enter into a legally binding contract shortly. Letters of comfort do not render the parties subject to contractual rights and obligations and are not legally binding.

A letter of intent will usually be classed as a letter of comfort if it is vague and does not contain the terms necessary to form a contract, such as details of the standard of work required and payment mechanisms.

 

How can you ensure your letter of intent operates as you intended?

 Letters of intent are not intended to act as a substitute for properly negotiated and accurately drafted contracts. Instead, they simply allow the parties involved in a construction project to undertake preliminary work while they finalise the necessary contractual arrangements.

What a particular letter of intent should include depends entirely on the circumstances. However, some general guidelines that apply to most letters of intent include the following:

  • You should detail the scope of the works involved clearly.
  • You should state that the letter of intent is just that and does not constitute a binding contract. However, as we have explained above, this position can be varied by your conduct, so you must tread carefully to avoid being bound by your letter of intent.
  • You should not include all the contractual terms in your letter of intent; the proper place for these is your binding contract.
  • You should ensure you enter into a properly drafted contract as soon as possible, and certainly before your letter of intent expires.
  • You should include a dispute resolution clause in case disagreements arise before the full contract has been finalised.
  • You should not go beyond the scope of the letter of intent.

 

If you need advice on preparing a letter of intent or the effects of one you have already signed, our expert construction team is ideally placed to help. With decades of both legal and commercial experience, we offer pragmatic legal advice at incredibly competitive rates.

 

For a confidential 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.