According to most professional bodies, you should ‘just say no’ when offered a letter of intent. However, the court recently said that it was not negligent to start a project under a letter of intent. So what advice is there on using letters of intent? One case (Cunningham v Collett) explains:

  • what to do before a letter of intent is sent – the parties should have agreed the minimum contents as well as “the contract terms are (or are very likely to be) agreed” and “there are good reasons to start work in advance of the finalisation of all the contract documents
  • whether letters of intent are wrong in principle – “although I consider that letters of intent are used too often in the UK construction industry, sometimes without careful or proper thought having been given to their consequences, I do not accept the argument that letters of intent of this sort are wrong in principle
  • whether it is ever appropriate to use a letter of intent – the court said provided the partners have agreed certain essentials “a letter of intent [may] be the best way of ensuring the works can start promptly, with a clear time-table both the for finalisation of contract formalities and for the carrying out the works themselves.
  • the practical problems with letters of intent – “once they have been sent, and the contractor has started work…all those involved…take their eye off the ball and forget about the importance of ensuring the full contract documents are signed as quickly as possible.”

The case also looks types of letters of intent, distinguishing between “those that create no rights and liabilities and those that do”. It saidmost letters of intent are not [true letters of comfort]…but are instead expressly designed to give rise to some albeit limited reciprocal rights and liabilities”.

It clarifies the minimum contents of a letter of intent to create certainty: parties, works, price and time and talks of the importance of carefully drafting your letter of intent “to minimise the risk to both sides if no contract eventuates“, for example “by limiting the amount of money that the contractor can spend…or by reference to the particular elements of work that the contractor is permitted to carry out“.

Of course, if you ignore this advice on letters of intent, then better to just say no!

Case: Cunningham & Ors v Collett & Farmer [2006] EWHC 1771 (TCC)

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