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Last edited 27 Jan 2018
Letter of intent
A letter of intent is a document expressing an intention to enter into a contract at a future date but creating 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.
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.
 Legal and negotiating position
Turner & Townsend were appointed as project managers for a number of projects at Ampleforth College. On the advise 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.
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:
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.'
 Related articles on Designing Buildings Wiki
- Ampleforth Abbey Trust vs Turner & Townsend Project Management Limited.
- Appointing consultants.
- Construction contract.
- Contract conditions.
- Contract engrossment.
- Contract execution.
- Essentials of a contract.
- Letter of appointment.
- Liquidated and ascertained damages.
- Professional Indemnity Insurance clause in conditions of engagement.
- Purchase order.
- Should You Do Preparatory Works Before Agreeing to a Final Contract?
- Template letter responding to request for bespoke appointment contract.
- Tender documentation.
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