When Are Letters of Intent Used in the Construction Industry?

Letters of Intent (LOIs) are a common feature in the construction industry, a pragmatic tool that helps projects get underway. However, there are many risks associated with them which often don’t become apparent until later.

Working under an LOI before the main contract is agreed is one of the most common and expensive mistakes in construction.

We act for construction employers and contractors in England and Wales already working under Letters of Intent or who have been asked to sign one. If you’re unsure of your legal position or already in a dispute, contact our specialist construction litigation solicitors. Our team act nationally and would be happy to help you.

Key Takeaways

• Letters of Intent are a valuable and practical tool common in the construction industry.
• LOIs can be detailed and allow contractors to start work while the longer form contract is still under negotiation.
• LOIs carry inherent risks if they are vague and lack sufficient detail which can lead to misinterpretation and disputes.

What Is a Letter of Intent in Construction? 

A Letter of Intent is an expression of your and the other party’s intention to enter into a more formal contract. It’s an agreement which allows specific aspects of the work to begin before you sign the more formal agreement.

LOIs are used by construction project employers for their main contractors and main contractors use them for subcontractors.

The general idea is to outline a skeleton version of the agreement so you can start preparatory work on a construction project while contract negotiations are ongoing. This minimises delays and costs, vital on construction developments with a sensitive timeline.

LOIs allow you to commence procurement, secure materials and services to meet project schedules, and undertake preliminary site preparation while the fine detail is finalised. They’re especially useful in large or complex projects where contract negotiations routinely take some time.

Sometimes, it’s not possible to agree on the fine details of a contract regarding aspects of price, specialist subcontractor packages, or risk allocation without some preparatory action. Planning or funding conditions may also require early activity.

The detail of the letter typically enables you to start an aspect of the work connected to the project. A Letter of Intent often contains a cap on value and what is called a ‘drop dead date’, an expiry date after which the letter is no longer valid.

You may find yourself dealing with revisions to an LOI which can have several different versions if the initial phase of work completes and contractual negotiations drag on.

The Different Types of Letter of Intent 

There is no standard legal format for LOIs in the construction industry. Despite non-standardisation, practically speaking, Letters of Intent fall into three main categories:

• A non-binding letter. A simple document that records the parties’ intention to create a formal contract later. The lack of information in the letter leaves a void in which disputes can easily arise.
• An interim contract. These letters create a temporary binding agreement over a limited scope of work during which time contract negotiations continue. Typical activities include site surveys ahead of project commencement and the procurement of long lead-time materials with an agreed payment mechanism. There is often a monetary cap and an expiry date.
• A contract incorporating terms. Retrospectively, courts have treated LOIs as a contract for the full works based on the parties’ intentions, their subsequent behaviour, and in the absence of a signed agreement even though the LOI was never intended to fulfil this function.

A typical Letter of Intent contains an overview of the agreement with enough terms to enable you to start work. It should usually include the following details:

• The scope of the initial work which is defined as precisely as possible.
• Detailed payment terms and a payment mechanism.
• The maximum financial commitment, i.e. a monetary cap.
• A clear expiry date or other defined endpoint and what happens next (e.g. does the contractor have authority to carry on working if the parties agree a written extension or must work stop until the formal contract is signed?)
• Identify who has authority to issue instructions under the arrangement.
• Clarify insurance arrangements, which policies are required and who must obtain them.
• Identify who is responsible for and owns the partially completed work.
• A statement that the formal building contract will apply retrospectively to work carried out under the Letter of Intent.
• The outcome if the main contract is never signed.

It’s just as important that a Letter of Intent states what hasn’t been agreed as well as what has. Leaving areas vague or open to interpretation is a recipe for later disaster.

Marking a letter ‘subject to contract’ won’t prevent it from becoming legally binding. A court will look at the behaviour of the parties after the letter was issued and whether they intended to create legal relations.

The Legal Uncertainty Letters of Intent Create 

LOIs can create an uncertain landscape with ambiguities and misunderstandings that blur the legal framework, becoming contractually binding (or at least some elements of them) by default. Here are some examples of potentially problematic areas.

• LOIs typically authorise early works. Working beyond that initial scope, the stated expiration date or a monetary cap without updating the letter can lead to disputes over liability and payment. The courts have frequently enforced payment caps in cases where contractors have continued to work beyond the stated financial limit.
• An LOI might act as a counter-offer to the contractor’s tender submission meaning a contractor may have the option to renegotiate the submission later. 
• If the contractual terms are still under negotiation, it may be ambiguous as to which terms the LOI incorporates or whether they have been superseded.
• The insurance position may be unclear if not specifically addressed.
• Repeatedly extending an LOI can leave you on an uncertain legal footing if there are significant commercial issues surrounding the scope of works or price.

Parties often don’t give any thought to what will happen if they cannot agree contractual terms or if it takes too long. Disputes may arise if you assume the LOI is temporary but then carry on working beyond its intended limits.

Recognising the legal uncertainty and risks that LOIs create but also their value, the City of London Law Society (CLLS) published a revised construction letter of intent sample in 2024.

The revision captures industry developments including the recent Building Safety Act 2022 and aligns more closely with the Joint Contracts Tribunal (JCT) 2024 suite of contracts. However, this is just a template and requires careful review and adaptation to reflect the unique aspects of your project.

The Risk of Carrying Out Substantial Work Without a Finalised Contract 

The bottom line is that if you haven’t yet completed contractual negotiations with an employer or project owner, you may have inadequate protection if you start work under an LOI.

The courts have stated repeatedly that contractors starting work without a clear contract expose themselves and their employers to risk over:

• The scope of works
• Liability
• Contractual obligations
• Payments

Even though you are now on site and working, if the LOI contains a value cap or expiration date, the employer can still decide to use someone else once the cap is reached or the date has passed.

What the Courts Have Said 

In the case of RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co, the Supreme Court ruled that whether a contract is created depends on the behaviour of the parties and whether there is an intention to create legal relations.

In this case, an LOI was expressly marked ‘Subject to Contract’, a popular tactic used to try and avoid reaching the point of creating a binding contract. The LOI also featured an expiry date.

The contractor had carried out works, made payments, and agreed to vary the delivery programme, behaviour which the court ruled amounted to implicit acceptance that a contract existed.

The court also ruled that the parties had waived the right to sign the contract but that it was still effective without their signatures. The conclusion was that marking something, in this case an LOI, ‘Subject to Contract’ doesn’t necessarily mean that there isn’t a contract.

The point about the existence of a contract was reviewed again in Arcadis Consulting (UK) Limited v AMEC (BSC) Limited.

In this case, a binding interim contract arose from an exchange of letters instructing the contractor to start work. The trial judge had held that no set of terms, including a liability cap one party sought to rely on, had been incorporated into that contract. On appeal, however, the Court of Appeal disagreed and found the liability cap was incorporated by reference, overturning the earlier decision.

If work has begun, it is extremely likely that the court will determine a contractual relationship exists in some form regardless of the content of any LOIs. 

Statutory provisions under the Housing Grants, Construction and Regeneration Act 1996 can fill gaps in payment terms, providing an outcome neither side anticipated.

In Ampleforth v Turner and Townsend, the lack of agreement on a comprehensive contract meant the employer couldn’t levy liquidated damages. The subsequent settlement between the parties was therefore lower.

The employer was able to bring a successful action against their advisers for negligence, arguing that they had failed in their professional duty to advise of the risks inherent in LOIs.

If you’re concerned that an LOI you’re working under isn’t giving you the protection you need, speak to our specialist litigation solicitors before a dispute develops.

What Should You Do If You Are Working Under a Letter of Intent? 

If you’re already working under an LOI, you should view the situation as one in which the main contract may never be agreed.

• Drive contract negotiations forward proactively, don’t let them drift. Specialist legal advice can help expedite this and protect your position.
• Push for precise contractual terms. They give clear definition of the duties, rights, and remedies for all parties, and set up proper contract administration once the formal agreement is signed.
• If a dispute over payment or scope does arise, consider adjudication, which is a faster, statutory route to resolution than court proceedings.
• Monitor the LOI actively so financial caps aren’t exceeded and expiry dates don’t catch you out. Regular monitoring keeps the letter’s protection intact.

Frequently Asked Questions 

Is a Letter of Intent Legally Binding in the UK?

A letter of intent may be legally binding depending on the information it contains and the parties’ conduct. An LOI can be deemed a contract if it meets the requirements under English contract law such as the presence of something of value, typically money, in exchange for services.

What Are the Rules for Letter of Intent?

There is no recognised, standard format for an LOI or regulations about what they should contain. Best practice suggests specialist drafting with as much detailed information as possible. Regular reviews are essential to ensure protection remains as anticipated especially where the letter contains a financial cap or an expiry date.

What Are the Risks of Using a Letter of Intent?

The risks are that you create an unplanned contract via a mix of the contents of the letter and subsequent activities. This can adversely impact your legal rights and expose you to unforeseen and unwanted consequences. There’s also a risk that once work starts, contractual negotiations inexorably falter and never quite get over the line.

What Are Some Common Mistakes to Avoid in a Letter of Intent?

The most common mistake is vague, ambiguous drafting, which weakens your position and invites disputes. Lack of clarity can also create unexpected obligations once combined with how the parties actually behave, binding you to terms you never explicitly agreed.

Need Advice on a Letter of Intent Dispute? 

Letters of Intent are undoubtedly a valuable device in the construction industry tool kit and they’re commonplace. However, they are often created with not much thought given to the information they contain or awareness of the later consequences.

These letters require a clear understanding of their limitations and legal implications. They should be drafted with as much care as the construction contract to avoid misunderstandings, unexpected obligations, and costly disputes.

As a team of specialist construction solicitors, we provide cost-effective and strategic advice on all aspects of LOIs, including when work has been completed but no formal contract has followed. Protecting your interests is our priority throughout. No Win No Fee funding may be available on qualifying commercial, property, or construction disputes, subject to case assessment and our funding criteria. Typically, this applies to disputes valued over £10,000 with strong prospects of success.

If you’ve been asked to sign an LOI or have already started work under one, we can help you understand your legal position. Speak to our specialist construction litigation solicitors today. Our team have decades of experience acting in matters like yours and we would love to help you.