LETTER OF INTENT

Dos

·     Consider whether the letter (in whole or part) is intended to form a contract; it is often the case that the letter will be intended to be a contract, to ensure that the contractor has a contractual right to payment and the employer has a contractual right to the defined works to be carried out in a proper manner. This is critical as if all the information has been agreed and nothing is outstanding, then a court could interpret the letter of intent as being a complete contract.

·     Clearly identify the scope of the works; consider referring to the tender documents which describe the scope of the works. If the letter is only intended to cover a certain portion of the works then that should be stipulated.

·     Set out the matters to be resolved for the main contract to be entered into; ‘The following matters have yet to be resolved’.

·     Indicate that neither party intends to be bound until the letter is executed by each of them.

·     Set a limit on the amount that will be paid.

·     Set a limit on the period that the letter of intent will be valid for; provides a safeguard to the employer in terms of its exposure under the letter of intent and should also provide some motivation for both parties.

·     State that the contractor is not entitled to any further payment by way of quantum merit; this will prevent a parallel claim in restitution for quantum merit in addition to the amounts payable under the letter of intent.

·     Make it clear who is to be the instruction giver in relation to work to be carried out; this avoids later disputes between the employer and contractor as to whether work should or should not have been carried out and therefore if the employer is obliged to pay for it.

·       Make it clear that once the intended main contract is concluded it will apply retrospectively; this is particularly important as any payments under the letter of intent will be treated as payment on account of obligations in the main contract once this comes into force. This will help to prevent double claims for payment for work carried out, and avoid uncertainty for the contractor as to what he is being paid.

·       Make sure the letter of intent is actually issued by the employer; it is not appropriate for a letter of intent to be issued by a project manager because they may not have the actual authority to contractually bind the employer. This is a particularly important issue if you are a project manager being asked to enter into a letter of intent by the employer. This is also important where you are the contractor as you will want to be assured that you are being paid by someone who has a strong covenant.

Don’ts

·   See a letter of intent as a substitute for a properly drafted contract; if you rely upon a letter of intent you may find that it does not contain adequate terms for your protection and may leave many issues unresolved. This can lead to a dispute at a later date.

·   Have a letter of intent that incorporates all the terms of the contract; if it does, the court may decide that it is in fact a complete contract.

·   Forget to send a copy of the letter of intent to the other party for signature and return; both parties need to accept the terms.

·   Finally, don’t forget that you or your clients are at risk if the letter of intent is not clearly drafted.