Using Letters of Intent

Lawyers advise against the use of letters of intent because they know the pitfalls. Contractors and employers continue to use them because they are easy and convenient to get work off the ground.

The problem with letters of intent is the way they are drafted. A true letter of intent is a letter sent by an employer setting out his intention to enter into a contract at some point in the future.

It is not meant to be a fully detailed contract, or a watered down version of one, but simply a letter of comfort from one party to another. It should have only a short life while the detail of a formal contract is finalised and, strictly speaking, should do no more.

The ‘normal’ rules of contract will not apply as the letter has no binding effect. Traditionally, however, parties go one step further than the true letter of intent and introduce contractual effect into the letter. The parties enter into an “if” contract where A requests B to carry out certain works and promises B that if B carries out the works, A will pay him in respect of those works.

Parties should understand that the contractual principles which would normally apply to a building contract, for example implied warranties as to quality, may not apply to this form of letter.

Ultimately, the legal effect of the letter will depend on the drafting.

The letter of intent should be short, have an absolute cap on cost and liability, establish the standard and duty of care owed and have a clearly defined work schedule which should be uncomplicated and distinct in nature, thus avoiding room for disputes at a later date.

It should not be a letter purporting to incorporate a full schedule of works and set of JCT conditions.

If your project requires that a letter of intent is necessary, specialist advice should be taken on the wording of the document to avoid the inevitable pitfalls.