How bad are letters of intent really?
A real eye-opener activity, during my workshops on the Lifecycle of a Construction Contract, is to use a flipchart to compare what is in a ‘standard’ letter of intent with what the audience expects to see in a proper construction contract.
Letters of intent should be contracts, as the alternative is even worse – an obligation on the client to pay but no requirement for the contractor to meet any other obligations on time or quality. For a contract, your document needs to meet the five legal requirements (listed here) and all essential terms should be agreed (before work starts).
Just by focusing on 10 essentials, it is clear to see what’s gone AWOL (absent without leave) from LOI:
1 Parties: Tick. Hooray! [score 1/10]
2 Works: Rarely well-defined – anyone know when the ‘preparatory’ or ‘mobilisation’ works end and other works start? [1/10]
3 Time: Despite the fact that a letter of intent is mostly used to keep the project to programme, I have never seen a letter of intent with a clear date for finishing the works under the letter of intent, or a programme that reflects these works. There is no remedy to change that date for circumstances arising and no LADs if the works under the letter of intent run late! Under English law the contractor is granted a reasonable time to complete, which includes all circumstances that occur, and may be later than the client would like. (Click here for other purposes of a letter of intent) [1/10]
4 Price: Instead of a price for the works under the letter of intent, letters of intent include a promise to pay reasonable costs ‘if the proper contract is not signed’. This would be implied by English law in any event. In practice, payments are made by reference to the proper contract… [maybe half]
5 Quality: No reference to quality standards for goods, works, or services. No reference to the works information sections for the works under the letter of intent to clarify performance required. [not updating the score, too depressing]
6 Objectives: No reference to any clear objective except half-hearted comment about doing this pending the proper contract being signed. The letter of intent contains no remedy if the contractor refuses to sign (eg termination after a specified period). Read more on how to avoid the risk of the contractor not signing.
7 Risks: No reference to ground conditions as the major risk for early works on a project. Yikes!
8 Remedies: Possibly a right for the client to terminate (but one-sided), but no reference to other standard remedies like extensions of time, variations, delay damages, interest and suspension for non-payment, dispute resolution etc. Often the letter of intent does not comply with the minimum requirements of the Construction Acts 1996 and 2009… [half?]
9 Procedures: None, de nada, zilch, zero.
10 Limits: No limit on the contractor’s liability but often an ineffective limit on the sum payable by the client.
Most letters of intent score no more than 2/10 (being generous) for the bare minimum a contract needs. That’s truly shocking.
If you want to check that your letter of intent is better than this, download my free Checklist.
When things go wrong with letters of intent, the consequences depend on which side of the project you are on. For more about each of these actors read on:
- Wrong for a client means start late or no contract, neither of which are great results
- Wrong for a contractor means the full contract is never signed. Either the contractor has no obligation to continue the project, or it does and there is no method of calculating a price for the works completed.
- Wrong for the contract administrator means allowing works to continue under a letter of intent, which is negligent.
- Wrong for a funder means lending money when there is no real contract, no warranties or TPR and the risks to its borrower are too high.
- Wrong for an adviser might mean a claim for costs not recoverable against a defaulting party due to a lack of proper contract.
If you want to minimise letter of intent disputes, then you need to understand the strategy, create a better letter and use it wisely (read more).