Good Intentions, But Unintended Consequences?

• Published date: 13 April 2021
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Contracts and Commercial Law, Construction & Planning
• Law Firm: Fenwick Elliott LLP
• Author: Ms Laura Bowler

Letters of intent are commonly used within the Construction Industry as a way of starting work (such as procuring materials, preparing site and, in some cases, commencing work) before a formal construction contract has been entered into. Also known as 'comfort letters', their purpose is fairly constant – to enable a contractor or subcontractor to commence an aspect of the works with some assurance that they will get paid and be in line for the 'formal' contract, while preserving the ability of the main contractor or employer to limit its commitments early on. Despite their frequency of use, because letters of intent do not have any standard format, their precise effect can vary widely from a letter which merely expresses a party's intention to enter into a contract, but which creates "no liability in regard to that future contract",¹ to a binding contract that ends up governing the whole of the works.

Lawyers would always advise parties to enter into a formal contract rather than commence work under a letter of intent, but this is not always practical. If you must use a letter of intent, try to keep in mind some of the following tips.

Saying it is 'subject to contract' won't stop a contract coming into existence

It is not uncommon to find 'subject to contract' (or similar wording) at the top of a letter of intent. This is because – for whatever reason – the parties cannot yet agree the 'formal' contract and do not want the letter of intent to govern their entire relationship. However, this conditional wording is not a magic bullet; where significant work has been done and paid for, the courts will be reluctant to find that there was no contract.

In RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co. KG² , the employer had sent a letter of intent containing a draft contract and a clause which set out that the terms would not be binding until signed by both parties. Whilst the formal contract was never signed, the court decided that, following the letter of intent, the actions of the parties (such as carrying out works and varying the delivery programme) created a binding contract. This was despite the fact that the letter of intent did not contain many of the detailed provisions that would be expected of a contract.

Be clear which letter of intent applies

By their nature, letters of intent can be informal and arise through correspondence between the parties. Where proposals have been sent back and forth, it is vital that the parties are...