There are three elements to avoiding and minimising disputes when you are using a letter of intent.
The first is to recognise that a letter of intent is merely the first stage in the contract negotiation process. A letter of intent is a means to an end not the end itself. You must not treat your letter of intent – a temporary quick-fix solution – as a permanent solution or strategy. You must get on and sign the full contract for the whole project.
As Turner and Townsend found to their cost in the Ampleforth case, while it is not negligent to advise a client to start a project under a letter of intent, it can be negligent to allow the project to continue under one. To avoid disputes arising from negligence, you need to fully understand and advise the client of the pitfalls of working under a letter of intent compared to using the full contract. Some remedies or rights that are missing from a letter of intent include:
- A fixed date for completion and pre-agreed damages for delay (known as liquidated damages)
- Rights for the client and the contractor to terminate their agreement under clear circumstances
- Rights of inspection and remedies for defects in the works carried out.
The second is to create a better letter of intent. Existing versions are a mish-mash of functions: heads of terms, mini-contract, fall-back position if the full contract is not signed, liberally sprinkled with a random variety of other clauses, recycled or picked due to familiarity rather than because they meet a specific need. Your letter of intent should not follow this route.
You need to create a crisp and clear mini-contract. Your letter should focus on these 4 critical contents: parties, limited initial works, fixed price for those works, and times to start and complete those works. Too many letters of intent are sent when nobody knows which specific works, goods, and services are required to keep the project to schedule … and so they are not correctly identified in the letter of intent. Instead woolly phrases are adopted to hide the parties’ ignorance.
Of course, if your letter of intent is NOT a contract then the contractor can walk away at any time!
Lastly, you need to use your letter of intent correctly. It should be used for very limited works only.
The client should not be tempted to issue changes to the initial works or sequential letters of intent to continually extend the scope of the works that the contractor can complete. Once 5 letters of intent have been issued (as in ERDC v Brunel) then you are missing the point! The contractor should not be tempted to continue works beyond those instructed in the hope that it will get paid (it might not, as Mowlem found in the Stena case).
Before you send your letter, you should have a drop-dead date by which the full contract should be signed. If the contract is still not agreed or signed by that date, then the client has to be prepared to terminate the contractor’s engagement, ask it to leave the site, and come to an agreement on the costs payable for the works completed. It is far better to have a plan for what will happen if the full contract is not signed and split amicably at that point, than to carry on in the hope that the parties – or the courts – will be able to sort out your differences.
Cases: Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd  EWHC 2137, ERDC Group Ltd v Brunel University  EWHC 687, Mowlem Plc v Stena Line Ports Ltd  EWHC 2206