Introduction
In the construction industry, commercial pressures often demand that work commences before the parties have finalised and executed a formal building contract. To facilitate this, parties frequently use a Letter of Intent (LOI). An LOI is a document that expresses an intention to enter into a contract in the future and authorises a party, typically the contractor, to begin preliminary works. However, the legal status of these documents is notoriously uncertain. This essay argues that while LOIs can serve a practical commercial purpose, their inherent ambiguity regarding whether they form a binding contract or are merely a statement of future intention creates significant legal and financial risks for all parties involved.
The Uncertain Contractual Status of Letters of Intent
The central legal issue with an LOI is whether it constitutes a binding contract. For a contract to exist, there must be an offer, acceptance, consideration, certainty of terms, and an intention to create legal relations (Keating, 2021). The ambiguous language often used in LOIs makes it difficult to determine if these elements are present. The courts must examine the specific wording of the document and the conduct of the parties to ascertain their objective intentions.
The case of British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] is a foundational authority on this point. Cleveland Bridge sent a letter of intent to British Steel for the manufacture of steel nodes, requesting that they begin work immediately pending the formal contract. The parties failed to agree on key terms, including price and liability for late delivery, and no formal contract was ever signed. When British Steel claimed payment for the nodes, the court held that no contract had been formed. The LOI was simply a request to start work, and the essential terms were not agreed upon. Consequently, British Steel could not sue for breach of contract but was entitled to payment on a quantum meruit basis – a reasonable sum for the work performed. This case demonstrates the classic risk: without a binding contract, parties are left without the protections of agreed terms, such as payment schedules or limitations on liability.
Judicial Interpretation and Commercial Risks
The outcome in every case depends on the document's specific wording. Courts have found that an LOI can create different types of legal relationships. It could be a limited contract governing only the preliminary works, a full but temporary contract on standard terms until replaced by a formal document, or, as in British Steel, no contract at all (Uff, 2017). The inclusion of phrases like "subject to contract" creates a strong presumption that the parties do not intend to be bound. However, this presumption can be rebutted if the parties, by their subsequent conduct (such as carrying out substantial work), demonstrate a clear intention to be bound by an agreement.
The persistent dangers of proceeding under an LOI are illustrated by the more recent case of Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd [2018] EWCA Civ 2222. Here, work was carried out for a considerable period based on correspondence and interim agreements, but a final, formal contract was never executed. A dispute arose, and the crucial question was which terms governed the relationship. The Court of Appeal found that a simple contract had come into existence based on the early correspondence, which included a cap on the consultant's liability. The employer had intended for a more detailed contract with a higher liability cap to be signed, but this never happened. The result was that the consultant’s liability was capped at a much lower level than the employer had anticipated. This highlights the significant commercial risk for an employer who allows work to proceed without finalising the contract terms, as they may be bound by less favourable terms contained within an LOI. The case serves as a modern warning that relying on an LOI is a poor substitute for a finalised contract.
Conclusion
The phrase "Lett or intent" aptly encapsulates the ambiguity at the heart of letters of intent. Such a document might operate as a limited contract to 'let' the works begin, or it may be nothing more than an expression of future intention with no binding force. As the case law demonstrates, the legal effect of an LOI is determined on a case-by-case basis, leading to uncertainty and the potential for costly disputes. While commercially convenient for enabling a quick start on site, this convenience comes at a high price. Parties who rely on LOIs expose themselves to risks, including the absence of key contractual protections and the possibility of being bound by unintended terms. Therefore, the use of letters of intent should be approached with caution, and they should be replaced by a fully executed contract at the earliest opportunity.
References
Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd [2018] EWCA Civ 2222.
British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504.
Keating, D. (2021) Keating on Construction Contracts. 11th edn. Sweet & Maxwell.
Uff, J. (2017) Construction Law: Law and Practice. 12th edn. Sweet & Maxwell.
