How bad are letters of intent really?
A real eye-opener activity, which I have used during my LOI lunch & learn workshops, is to compare what is in a ‘standard’ letter of intent with what you’d expect to see in a proper construction contract.
Letters of intent should be contracts. Not having any contract is much worse – you may be left with an obligation on the client/contractor to pay for any works carried out (at a price to be determined) but no related requirement on the supplier to meet any specific obligations on time or quality.
As you want your letter of intent to be a contract, it needs to meet the five legal requirements and all essential terms should be agreed, ideally before work starts.
What’s missing?
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 so-called ‘preparatory’ or ‘mobilisation’ works end? [1/10]
3 Time: Weirdly, although the main reason we use a letter of intent is to keep the project to programme, I have never seen a letter of intent with a clear date for finishing just the works under the letter of intent, or a programme that reflects these works. There is no remedy to change the programme nor delay damages if the works run late! So essentially, the supplier has a reasonable time to complete (aka as long a piece of string). [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 specific sections of the works documents that relate to the works under the letter of intent so no clarity about the standards of performance required. [not updating the score, too depressing]
6 Objectives: No reference to any clear objective for the project or for the parties… except a half-hearted comment about doing this ‘pending’ the proper contract being signed. The letter of intent contains no remedy if the supplier refuses to sign (eg termination after a specified period). [learn about are the risks of the supplier not signing].
7 Risks: No reference to any risks, including ground conditions which are a major risk for early works on a project. <Yikes!>
8 Remedies: Possibly a right for the client/contractor 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 supplier’s liability but often an ineffective limit on the sum payable by the client/contractor.
Most letters of intent score no more than 2/10 (being generous) for the bare minimum a contract needs. That’s truly shocking.
What should you do?
To check that your letter of intent is better than this, read Part D of How to Write Simple and Effective Letters of Intent in Just 500 Words and download my free Checklist.
