letterS OF INTENT
Navigating problems and pitfalls
Letters of intent are frequently used in the UK construction industry to expedite the commencement of work before a formal contract is executed. While they serve a practical purpose, they can create more problems than they can solve and are frequently the subject of disputes. They can lead to significant legal and commercial risks if not properly drafted or understood. This article reviews the legal nature of letters of intent, highlights key case law and offers best practices for their effective use.
What are letters of intent?
Letters of intent come in many different forms. A letter of intent will generally express an intention in writing of one party to enter into a contract with another party at a future date. They are generally not binding and do not create liability with regards to that future contract, save in exceptional circumstances. Any disputes regarding the interpretation of a letter of intent will require consideration of the contents and the surrounding circumstances of each letter of intent in order to ascertain whether the party issuing the letter of intent has incurred any liability.
Any disputes regarding the interpretation of a letter of intent will require consideration of the contents and the surrounding circumstances of each letter of intent in order to ascertain whether the party issuing the letter of intent has incurred any liability.
Letters of intent have been described by Coulson LJ (as he then was) in Cunningham & Ors v Collett & Farmer [2006] EWHC 1771 (TCC) as follows:
“82. There is a danger of confusion when talking generally about letters of intent. It seems to me that there are two distinct types of letters of intent: those that create no rights and liabilities and those that do. 83. A letter of intent, properly so called, is a document which expresses an intention on the part of party A to enter into a contract in the future with party B but creates no liability in regard to that future contract. It is expressly designed to have no binding effect whatsoever. Given that such a letter of intent is expressly designed not to create any liability or entitlement on either side, such a letter can hardly be objectionable. Of course, the reality is that, in the construction industry today, most letters of intent are not in this form, but are instead expressly designed to give rise to some, albeit limited, reciprocal rights and liabilities”.
Why use letters of intent?
Letters of intent are often used in the construction industry whilst contract negotiations are being finalised and there are good reasons to start working in advance of all the contract documents being finalised. This enables the parties more time to agree outstanding terms and conditions and to prepare the formal construction contract. Thus, provide comfort to a contractor, subcontractor, designer or supplier with regard to payment.
The types of letters of intent
Letters of intent are often used in the construction industry whilst contract negotiations are being finalised and there are good reasons to start working in advance of all the contract documents being finalised.
Letters of intent come in many different forms subject to the needs of the parties. In ERDC Group Ltd v Brunel University [2006] EWHC 687 (TCC), Judge Lloyd QC stated at paragraph 27 that:
“Some are merely expressions of hope; others are firmer but make it clear that no legal consequences ensue; others presage a contract and may be tantamount to an agreement ‘subject to contract’; others are contracts falling short of the full-blown contract that is contemplated; others are in reality that contract in all but name. There can therefore be no prior assumptions, such as looking to see if words such as ‘ letter of intent’ have or have not been used”.
The phrase ‘ letter of intent’ is not a term of art (ERDC Group Ltd v Brunel University [2006] EWHC 687 (TCC)) and each case will depend on the individual circumstances as to its meaning and effect. letters of intent are either binding or nonbinding.
Problems and pitfalls
Letters of intent are used too often in the construction industry as a way of avoiding, or at least off, potentially difficult questions as to the final make-up of the contract and the contract documents (as stated by Coulson LJ (as he then was) at paragraph 89 in Cunningham & Ors v Collett & Farmer [2006] EWHC 1771 (TCC). The problems and pitfalls regarding the use of letters of intent are numerous and include the following disputes set out below that have been heard in the Technology and Construction Court.
Letters of intent and caps
Letters of intent are used too often in the construction industry as a way of avoiding, or at least putting off, potentially difficult questions as to the final make-up of the contract and the contract documents.
The case of CLS Civil Engineering v WJG Evans and Sons [2024] EWHC 194 (TCC) emphasised the importance of clearly defined caps within letters of intent. WJG Evans and Sons argued that the construction contract between the parties was governed by the JCT Intermediate Building Contract 2016. CLS Civil Engineering disagreed.
WJG Evans and Sons was seeking a final valuation of £1,413,669.24. The court held that the cap of £1.1m stipulated in the letter of intent was binding, preventing the contractor, WJG Evans, from recovering costs beyond the cap of £1.1m. The judgment also reinforced the importance of ensuring that all parties understand that the letter of intent might be the only binding document, especially if no final contract is agreed upon.
Cost cap and letter of intent gives rise to contract
In Mowlem PLC v Stena Line Ports Ltd [2004] EWHC 2206 (TCC), the Technology and Construction Court held amongst other things that the relationship between the parties was governed by a letter of intent which limited the contractor’s entitlement to payment to the sum of £10m. The contractor’s claim for payment of a sum of money in excess of £10m was rejected. letters of intent will not generally give rise to a contractual relationship between the parties. However, the letter of intent in this case created a contract. The letter of intent in question would not make commercial sense to have a financial limit which could have been avoided by the contractor continuing with work and exceeding the financial limit.
Payment: The Housing Grants Construction and Regeneration Act 1996 (as amended)
When drafting a letter of intent, it is important that the payment provisions are clear because if it is deemed a construction contract under the Housing Grants Construction and Regeneration Act 1996 (as amended), it will be caught by the payment provisions in the act.
Letter of intent and limitation of liability – High Court and Court of Appeal judgments
The judgment also reinforced the importance of ensuring that all parties understand that the letter of intent might be the only binding document, especially if no final contract is agreed upon.
In the first instance decision in the High Court of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] EWHC 2509, Arcadis argued amongst other things that there was a cap on liability in the sum of £610,515.00. The Technology and Construction Court held that the reference in the letter of intent regarding terms and conditions (cap on liability) had not been incorporated.
On the same set of facts in the Court of Appeal in Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2018] EWCA 2222, the Court of Appeal overturned the decision of the High Court. The Court of Appeal held that the first set of terms and conditions had in fact been agreed by the parties and were therefore incorporated by reference to the party’s letter of intent. Arcadis’ liability was limited to £610,515.00.
Supreme Court: letters of intent and the existence of a contract
The Court of Appeal held that the first set of terms and conditions had in fact been agreed by the parties and were therefore incorporated by reference to the party’s letter of intent.
In RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14, the letter of intent included amongst other things:
- The agreed price for the engineering, build, delivery, installation and commissioning £1,682,000.
- RTS is now to commence all work required in order to meet Müller’s deadlines set out in the offer... delivery... in accordance with the timetable set out in the offer.
- Full contractual terms will be based on Müller’s amended form of MF/1 contract and the full terms, and the relevant technical specifications will be finalised... four weeks of the date of this letter.
The main issue to be decided by the Supreme Court was whether the parties entered into a contract following the expiry of the letter of intent and, if so, the terms of that contract. The High Court in the first instance held:
In the Court of Appeal, on the same set of facts, the court unanimously allowed the appeal and made a declaration that no contract came into existence after termination of the letter of intent.
“… After the expiry of the letter of intent there was a contract and that the parties had reached full agreement on the work that was to be done for the price they had already agreed. The judge held that the contract was based on limited terms and did not include the final draft version of certain terms known as the MF/1 conditions (Müller’s standard contract conditions)”.
In the Court of Appeal, on the same set of facts, the court unanimously allowed the appeal and made a declaration that no contract came into existence after termination of the letter of intent.
The matter was finally appealed in the Supreme Court, which unanimously allowed the appeal and reached a different conclusion from both the High Court and the Court of Appeal. In doing so, the Supreme Court held amongst other things that:
“Although there was no formal contract, Muller and RTS did reach a legally binding agreement and that that agreement contained wider terms than the limited terms found by the judge”.
The Supreme Court further stated:
“The different decisions in the courts below and the arguments in this court demonstrate the perils of beginning work without agreeing the precise basis upon which it is to be done. The moral of the story is to agree first and start work later”.
Steps to minimise the risks associated with letters of intent
Be clear from the outset about the purpose of the letter of intent, i.e. whether it is binding or non-binding.
Points to consider in order to minimise risks associated with letters of intent include, but not limited to the following:
- Be clear from the outset about the purpose of the letter of intent, i.e. whether it is binding or non-binding.
- What terms and conditions apply to the letter of intent and whether it includes a particular standard form of contract.
- Payment provisions and any cap on payment.
- Is it clear from the letter of intent what the scope of works to be carried out are and the procedure with regard to rectification of any defective work.
- Time for completion of works and how any extension of time may be administered in relation to any agreed programmes.
- Limitation of liability.
- Whether the contract to be executed will apply retrospectively to the work carried out pursuant to the letter of intent.
- Does the letter of intent have an expiry date.
- Record any provisions of the proposed contract that have been agreed between the parties.
- Record any outstanding issues which are yet to be agreed between the parties prior to the execution of the proposed contract.
Conclusion
It is clear from the various decisions in the Technology and Construction Court, Court of Appeal and the Supreme Court, what the perils of beginning work without agreeing the precise basis upon which it is to be done are RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] UKSC 14 [paragraph 1].
I am not suggesting the construction industry should abandon the use of letters of intent, however, letters of intent should be used with great care to minimise the risks associated with their use and only after having taken proper legal advice.
As stated by Coulson LJ (as he then was in the High Court) at paragraph 89 in Cunningham & Ors v & Farmer [2006] EWHC 1771:
“That letters of intent are used too often in the construction industry as a way of avoiding, or at least putting off, potentially difficult questions as to the final make-up of the contract and the contract documents. But, having said all that, I do not agree that letters of intent are, as a matter of principle, always, or almost always, inappropriate. There will be times when a letter of intent is the best way of ensuring that the works can start promptly, with a clear timetable both for the finalisation of the contract formalities, and for the carrying out of the works themselves”.
In conclusion, I am not suggesting the construction industry should abandon the use of letters of intent, however, letters of intent should be used with great care taking on board the points set out above (which is not an exhaustive list) to minimise the risks associated with their use and only after having taken proper legal advice.
Charles Edwards is chair of the CICES Contracts and Dispute Resolution Panel.