Letter of Intent

In most cases the employer wants the contractor on site before the negotiations have been completed and a formal contract signed. So how can the parties start work without the comfort of a contract but still be protected? One of the tools commonly used is a letter of intent – but what is it and what is the effect of using one?

Benefits of a Letter of Intent

• Gets the contractor on site and the build started.

• An earlier start may reduce the employer’s borrowing costs in the long run.

• Provides some comfort for the contractor that they will get paid for the work done.

• Allows the parties to undertake specific works pre-contract without the obligation that the whole works must be completed.

Are they binding?

The effectiveness depends on the form and content. Many people think they are just a “statement of intent” but in reality they often create a contract. Provided that it is drafted correctly, a binding letter of intent (as oppose to a non-binding letter of intent) will be created where there is certainty in the area of offer, acceptance, consideration and intention to create legal relations.

To create a binding letter you need to consider:

• The aim of the letter – what are you trying to achieve?

• The terms and conditions applying to the works referred to in the letter.

• The requirements for quality and timing of the work.

• Are there any insurances that need to be maintained?

• Are copyright licences required?

• Payment – how much / when (instalments) / how (BACS / cheque etc)?

• How is a dispute going to be resolved (adjudication / arbitration)?

• How are the parties going to end the Letter of Intent arrangement?

• What happens if a formal contract is entered into?

Is it a “construction contract” under the Construction Act 1996?

Provided that the operation / work that the contractor is conducting is a “construction operation” within s.105 of the Act then the letter of intent will be a qualifying “construction contract”.

• This classification will provide additional implied terms such as:

• Both parties’ ability to refer a dispute to adjudication;

• The contractor’s entitlement to staged payments (this will have an effect on the payment clause included in the letter of intent);

• The employer’s requirement to serve a withholding notice to withhold payment;

• The contractor’s right to suspend for non-payment etc.

Expiration of a Letter of Intent

The parties should ensure that one of the following is achieved:

• No further work is carried out after expiry; or

• The expiry date is extended in writing; or

• The formal contract is signed / executed before expiry.

For further information on how to deal with Letters of Intent or any construction related issue contact
Russell Deards on 01332 226 179 or russell.deards@flintbishop.co.uk  

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Russell Deards
Partner and head of construction & engineering
russell.deards@flintbishop.co.uk
DD: + 44 (0)1332 226 488

Nicola Mather
Personal assistant to Russell Deards
nicola.mather@flintbishop.co.uk
Tel: + 44 (0)1332 226 162