In a construction context, a 'letter of intent' can be issued prior to finalisation of formal appointment wording to enable works to start whilst the final contract terms and details are still being agreed.
As such, they are normally (but not always) issued by an employer to their preferred contractor. There are also some general features which are common to most (but not necessarily all) letters of intent; such as scope of works, timelines, and either a payment sum or an agreed mechanism by which a payment sum will be determined.
However, there is no standard template for a letter of intent and each such letter must be considered as a standalone basis of an agreement. Due consideration will need to be given to the exact wording of the letter to determine its meaning and effect.
In addition to the actual wording used, other factors such as the wider context of the project and any pre-existing relationship or regular course of dealing between the parties may be taken into consideration by the court when interpreting the parties' supposed intentions and scope of agreement.
By their very nature, a letter of intent is less detailed and less prescriptive than a fully worded formal written contract. Otherwise, the parties might as well have just agreed to a standard contract wording.
This lack of detail in a letter of intent creates scope for ambiguity as to both the terms and status of such letters. Such uncertainty can lead to costly disputes such as the recent case reported as CLS Civil Engineering Ltd v WJG Evans and Sons Ltd [2024].
Is a letter of intent a contract?
The first key question to consider for any dispute relating to a letter of intent is whether it is a contract at all?
To be recognised in law as a contract between at least two parties, there must generally be offer and acceptance and an intention to be legally bound with an agreement providing for good consideration.
A contract is like a thoroughbred race horse - you need all four limbs or it's not going to get you very far!
For that, once again, you have to look at the wording and apparent intention of the parties.
But, if something looks like a duck, quacks like a duck, and intended to create mutually enforceable legal obligations including appropriate payment provisions like a duck… then mind your head, because you've probably got a contract!
If so, what are the contract terms?
If there is a contract, then the second key question is what are the terms of that contract and what works does it cover?
A letter of intent may provide for works to cover an entire project but more commonly will be limited to only some defined initial stages of development.
They may also provide for open-ended costs but will often include some kind of cap on the maximum sum that may be payable to the contractor unless and until some further agreement has been reached.
An employer always should check that any letter of intent includes such limits and caps where appropriate. Otherwise, they may end up liable for more than they would have liked to have agreed.
On the other side of the situation, a contractor should ensure that they do not proceed with any works beyond any agreed limitation or exceed the value of such liability cap without first agreeing further terms with their employer. Doing so risks undertaking works being undertaken by the contractor for which they may have no contractual entitlement to payment.
CLS Civil Engineering v WJG Evans and Sons
In the unfortunate case reported as CLS Civil Engineering Ltd v WJG Evans and Sons Ltd [2024], a contractor started work building a library, retail unit, and three residential apartments.
Since the parties had not yet agreed full contract terms, the employer issued a letter of intent including basic payment provisions. That letter provided very clearly for an overall payment liability cap of £150,000 plus VAT.
However, subsequent letters of intent issued during the course of ongoing negotiations increased the scope of works and liability cap up to £1.1 million plus VAT.
The negotiations between the employer and contractor failed to result in a final agreed form of contract wording for completion of the project. The employer then terminated the contractor's appointment and sought to rely upon there being an agreed liability cap of £1.1 million as specified in the latest letter of intent.
The contractor claimed entitlement to payments in excess of £1.4 million on terms of the standard JCT Intermediate Form of Contract 2016 for which the details were still being negotiated.
The employer did not dispute that sums were due to be paid under the letter of intent but issued proceedings under CPR Part 8 seeking a declaration from the court as to the applicability of the liability cap.
The contractor did not dispute that the letters of intent included a liability cap. However, they argued that this had been superseded by an agreed contract on the alternative terms of the JCT standard form of contract.
The court said "neigh" to that argument - the parties were still in the process of negotiating the terms and no firm offer by either party had been unequivocally accepted by the other party. Without all four limbs of a contract, the contractor's position fell at the first hurdle.
Conversely, the letters of intent were held to form the basis of a legally binding contract. They defined the relevant works and set out a mechanism by which the contractor would be paid by the employer for the works which they had in fact then undertaken.
It followed, therefore, that any cap specified in those letters would be binding on the parties unless agreed otherwise.
The contractor did also try to rely upon an argument of estoppel to say that the employer had waived their right to claim that the standard JCT terms did not apply to supersede the letters of intent.
However, that idea was also quickly put down by the stewards.
The court held that the facts showed that negotiations between the parties were actively ongoing and so neither had represented nor could reasonably have understood that alternative contract terms had been agreed.
Further, even if the JCT contract terms were to have applied, then the court held that the cap could still have been valid as this had been separately agreed.
This latest decision is entirely consistent with the established position.
However, the judgment reinforces the basis on which letters of intent can be held to be contracts themselves and could have legally binding terms which can have very significant consequences for the parties.
Conclusion
Letters of intent can be used as a practical and commercial way of getting works started whilst final contractual negotiations are ongoing.
However, the warning for unwary parties is clear:
- due consideration must be given to the risk exposure created;
- contractors should be careful not to exceed any limit of agreed scope of works or costs cap without further agreement;
- uncertainty will remain until the parties have agreed final formal contract wording; and
- unless and until that formal contract wording is agreed, a lame contractor will always be at a risk of termination by their employer.
