Letters of intent in construction

Insight

Letters of intent in construction

In some cases, an employer will want a contractor to start developing designs or to start on site before negotiations have been completed and a formal contract signed.

Parties can start work without the comfort of a full contract and still be protected by using a letter of intent, but what is it and what is the effect of using one?

Benefits of a letter of intent

Allows the contractor to start on the design, site or other tasks early, which could result in a reduction of borrowing costs for the employer in the long run.
Provides some financial security for the contractor that it 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.

Is a letter of intent binding?

The effectiveness of a letter of intent depends on the form and content. Many people think a letter of intent is 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 opposed 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 of intent, you need to consider:

What is the aim of the letter of intent?
What terms and conditions apply to the works referred to in the letter of intent?
What are the requirements for quality and timing of the work?
Is there any insurance that needs to be maintained, such as PI insurance?
Are copyright licences required?
How much needs to be paid; when are the instalments and how to pay (BACS, cheque, etc.)?
How is a dispute going to be resolved (adjudication, arbitration, etc.)?
How are the parties going to end the arrangement?
What happens if a formal contract is entered into?

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

Provided that the operation/work that the contractor is conducting is a “construction operation” within section 105 of the Construction 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 may have an effect on the payment clause included);
The employer’s requirement to serve a pay less 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.

Letters of intent in construction