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.