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Using a letter of intent has become commonplace in the complex world of construction contracts. While not constituting formal contracts, letters of intent serve as a tool for initiating work before final contracts are ready.
However, understanding their legal implications and navigating potential risks is crucial for all parties involved.
In this blog, I summarise what a letter of intent is for, along with the positives and negatives of having one.
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What is a letter of intent?
A letter of intent is a document that parties use when considering entering a potential construction project. It outlines the intentions of both parties, clarifies roles, and manages expectations.
The effect of letters of intent can vary depending on the needs of the parties and project. Some effects are:
- It signifies an intention to enter into a future contract without immediate legal obligations.
- It acts as an interim contract until the parties enter into a formal contract. As these types of contracts are typically quite time-consuming, a letter of intent can help when time is of the essence.
- In certain cases, it might constitute a binding offer capable of acceptance.
A letter of intent is a formal document typically under 10 pages long and often following a standard structure.
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Are letters of intent legally binding?
Although they appear like a formal document, letters of intent aren’t necessarily legally binding. They may only serve as a precursor to an official contract.
Some elements of a letter of intent can include legally binding provisions, for example, confidentiality or exclusivity clauses.
Due to the intricacies of legal language, it’s important to consult with a solicitor to clarify terms and understand your obligations.
A contract doesn’t always have to be written down and signed. Sometimes, just by acting in a certain way, you and the other party can create a contract without meaning to. This means that letters of intent can sometimes be seen as real contracts by a court, even if you never signed an official document later on.
Practical considerations and risks
Commercial pressures can often lead parties to use letters of intent, but they do come with risks.
Where there are no legally binding provisions in a letter of intent and no formal contract, you may waive your rights during potential disputes. The lack of a formal contract can result in legal ambiguities regarding rights and obligations. Even if there are no civil disputes, there is still a chance of disagreements and costly delays.
On the other hand, if you do have a letter of intent with legal obligations and you don’t realise they are legally binding or the parties act in a way that suggests they intended to be bound, you could be held liable for breach of contract.
Either way, it leaves you vulnerable in the case of a dispute. This is why it’s important to consult with a construction solicitor.
What are the advantages and disadvantages of using letters of intent?
The extent of the advantages and disadvantages will vary depending on the details of your letter of intent.
Advantages
- Alleviates time-constraints
- Allows more time for negotiations on contract details
- Helps to manage expectations
- Provides an initial agreement to work upon
- Flexibility in decision-making
- Clarity of scope of project
Disadvantages
- Not necessarily legally binding
- Can unintentionally become legally binding by the parties’ conduct
- Could contain hidden or misunderstood legal obligations
- No protection during a legal dispute
- Ambiguity on full project outcomes
- No proper controls are in place to ensure the project stays on track
- May encourage a delay in creating the official contract due to time pressures being alleviated
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Key elements of a letter of intent
I always recommend that my clients ensure they have an official construction contract in place for their projects. However, I understand that for many construction workers, letters of intent are necessary to reduce delays and prevent the project from falling through.
With that in mind, here are some key elements to draft in a letter of intent:
Project definition: Clear acceptance of the contractor’s offer and project scope.
Material contractual terms: Agreement on contract sum (or basis of payment), referencing tender documents, and amendments.
Project timeline: Instructions for project commencement date, site possession, and expected completion dates.
Contract form: The agreed official contract form (for example, a JCT), including warranties and performance bonds.
Fallback provisions: Establishment of a fallback date for contract signing so the parties have a date in mind and work towards finalising the contract.
Cancellation provisions: Terms for cancelling the letter of intent and determining works (services and payment) before formal contract signing.
Access rights: Provisions for site access under license, with defined rights and limitations. Even without a contract, these need to be determined before contractors are on site.
Dispute resolution: Mechanisms for resolving disputes. This covers both parties in the case of a dispute before a formal contract.
A construction solicitor can help you with reviewing or writing your letter of intent and official contract.
Should you use a template for a letter of intent?
There are online templates for letters of intent, and you can use them if it suits your project.
It‘s important to keep in mind that each construction project has its own nuances that a template may not cover, so one you find online may not be fit for purpose.
Who can write a letter of intent?
There is no requirement for a specific party in the project to write the letter of intent. Generally, all parties will work together on creating the final documents after negotiations.
As with all documents with high stakes, it’s advisable to seek advice from a legal professional.
What is the next step?
Once happy with the terms, both parties continue to uphold the agreement, moving forward with the project and finalising the contract.
I recommend that an official construction contract is drawn up to ensure you, your job, and your project are legally protected in all eventualities. A professionally drawn-up contract with terms negotiated by a solicitor offers the best protection during disputes.
If you’re unsure, you can consult a construction solicitor at any stage of the process.
Overall, letters of intent can be a valuable commercial tool for construction projects. However, you should treat them with caution. In general, you should avoid using letters of intent where both parties have enough time to finalise a formal contract before a project starts. It’s advisable to seek legal advice, ideally from the legal team negotiating the formal contract.
How can Britton and Time Solicitors help?
We know how stressful and costly construction disputes can be. That’s why our initial consultations with our construction solicitors offer you:
- Unlimited time to go through the details of your case and ask any questions
- An overview of your legal standpoint and your available options
- A precise time and fee estimate for your case
To arrange your initial consultation with one of our solicitors, simply call us on 0203 007 5500.
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