What is a Letter of Intent? 

Contrary to popular belief, the name ‘Letter of Intent’ is not a legal term. It simply spells out the fundamental aim of the letter being prepared - your intention, in whatever context you are using it. This insight seeks to provide some background on the power Letters of Intent provide, in the context of the construction industry. 

Letters of Intent have been defined as a letter given by an employer to a contractor (or a contractor to a sub-contractor) indicating an intention to enter into a formal contract at a future date to carry out the works described in the letter1.   In layman’s terms, it is a temporary document that allows a construction company (the contractor) to start their construction activities before the formal contract is signed. 

Why are they used? 

It is no secret that contracts take a long time to draft, negotiate, and finalise, in any industry. It is much the same with construction, with the added complication of needing to, for example, account for procurement. Procurement can take a long time, or perhaps the building needs to be erected by a specific non-negotiable date (e.g. to allow for delivery of crucial medical services, such as chemotherapy treatment), or maybe the consultants the contractor wishes to bring on board have a cut-off date for being able to join due to another project in the pipeline. 

It is for these reasons that being able to start the project before the pen hits paper gives the contractor invaluable time to carry out their design work, commence site preparations, and obtain all necessary materials to complete the primary elements of the project before the timer formally starts. It was from this that the concept of a ‘Letter of Intent’ was born. 

From the employer’s perspective, the presence of a letter of Intent means their contractor can start work before the final contract is signed, which brings forward the work’s completion date. 

For the contractor, there is inherent risk in expenditures that lack a contract’s safety-net to fall back on if all goes wrong. The Letter of Intent provides the contractor with protection in this regard, ensuring that it will be paid (as it would in the contract) for the works carried out. The extent to which payment security is covered by the Letter of Intent will be explored in more detail below. 

Main themes 

Letters of Intent can be broken down into the following themes: 

• Defining the project 
• Confirming the parties involved 
• Setting the stage for a formal contract by covering essential contract terms like scope, price, and timeline 
• Failsafe methods for dispute resolution 

Main terms of Letters of Intent 

• Scope of works 
• Price 
• Terms and conditions that apply to the works that are defined in the Letter of Intent 
• Requirements for the quality of work and timing of/completion of the works 
• Any insurance required to be maintained 
• A Copyright licence, if applicable 
• A payment clause and any caps on payment 
• A dispute resolution clause (that complies with the requirements in the Housing Grants, Construction, and Regeneration Act 1996) 
• Methods for ending the Letter of Intent arrangement, including what happens when the parties enter into the formal contract  
• The main terms and conditions of the underlying contract 

How to end a Letter of Intent must always be set out in writing in the letter. The industry standard is that the obligations set out in the Letter of Intent end when the formal contract documents are executed. At this point, the terms and conditions of that contract supersede the terms and conditions in the Letter of Intent, and the formal contract will act retrospectively, such that it covers the start of the works that were governed by the Letter of Intent (rather than the start of the works upon signing of the contract). This provides both parties with legal protection for the full duration of the working relationship, even after the Letter of Intent has dissolved. 

Conclusion 

It is safe to say that Letters of Intent are complex, and those seeking to use one for their construction project should pay close attention to precisely what they wish to achieve with it. Whether legally binding or not, or whether using a standard form template or bespoke, all come with their own advantages for your construction project. 

How Capsticks can help  

Our construction lawyers provide expert legal advice and end to end tailored support for clients who are involved in delivering construction projects across both public and private sectors. If you have any questions related to this insight and how Capsticks can help, please contact Catherine Kay.   

This insight is co-authored by Cora Danieli, Trainee Solicitor in our Corporate & Commercial team.