Letters of intent are commonly used in the construction sector. But what exactly are they?
They are normally used where the employer wants to start work, but for whatever reason there has not been time to finalise a formal contract with the contractor/sub-contractor, such as one of the JCT standard forms. The letter of intent gives the contractor comfort that it will be paid for its works and, in turn, allows the employer to get the contractor to start work.
There are two types of letter of intent. The first effectively creates a contract between the parties. The second does not. The general view is that there are very few advantages to using a non-contractual (and therefore non-binding) letter of intent.
A letter of intent that creates a contract (even if a basic one) gives the contractor some certainty as to when and how much he will be paid. For the employer, it also gives some certainty as to time for completion of the works, access and what terms and conditions govern the works that will be carried out, pending execution of the formal contract. If the letter of intent is non-contractual, there are no such certainties.
For a letter of intent to be binding, it should include such matters as:
- The agreement between the parties, preferably with provision for signature by the parties at the end of the letter.
- The amount to be paid for the works in question.
- What work is to be carried out.
If it is only intended to cover a certain a stage of the works, this should be clearly set out. Similarly, if payment under the letter is to be limited to a certain figure, this needs to be set out also.
If you are the contractor, you need to keep in mind that if you carry out work beyond the scope of the letter of intent, you may have no entitlement to be paid for that additional work. You therefore need to monitor your costs/work scope carefully.
Finally, a word of warning. There is a large body of case law concerning letters of intent, which shows how often these documents are incorrectly drafted. As always, if in doubt, seek advice.