Letters of intent - a worrying trend


Letters of intent in the past were frequently used to plug the gap between an employer's acceptance of a contractor's tender and the signing of a formal contract. However, since the decision of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137 (TCC), a reluctance to issue letters of intent has been observed due to a belief that these are now "dangerous territory".

Are letters of intent always "dangerous territory"?

No - they are only dangerous if used in the wrong circumstances and/or are badly drafted.

The repeated use of, and/or extension of, a letter of intent for works is not an appropriate substitute for a contract. Parties should not proceed on a letter of intent where there are significant commercial issues which are not agreed and they should not be able to act under the letter for an indefinite period of time.

The reality of tight programmes, prices and other commercial pressures often means that it may be necessary for a contractor to order materials or start work on site before details of all terms and technical documents are finalised and ready to be incorporated into the contract.

Parties often wish to hold off on signing a letter of intent based on an unrealistic expectation that the contract is "not far away". Consequently, works are carried out with no letter of intent or contract in place. Finalising the contract details may then take longer than expected and weeks pass by without a signed contract. The risks associated with parties proceeding without clear terms and conditions can be reduced by a letter of intent.

What should a well drafted letter of intent contain?

A well drafted letter of intent should contain:

clear reference to the technical documents which are finalised and which will apply to works carried out under the letter;

a definite date upon which the letter will expire (this will act as a motivation for the parties to have a signed contract by such date);

reference to the contract conditions to apply (with any agreed amendments appended to the letter if available); and

a financial cap on the amount payable by the "employer" under the letter – the contractor should not proceed to carry out works of a value exceeding this cap.

Parties could be more at risk by allowing works to proceed without a contract than by putting in place a comprehensive and tightly drafted letter of intent. The key is to ensure all sides view such a letter as a temporary measure with a real momentum in place to have a formal contract signed as soon as possible.