Contract Formation · FIDIC · UAE Law

Letters of Intent in Construction — Binding Effect and Legal Exposure

Letters of intent are one of the most poorly drafted instruments in the construction industry — and one of the most commonly disputed. This guide sets out what makes them binding, what the contractor can recover under a quantum meruit claim, and how to draft letters of intent that limit legal exposure on both sides.

12 min read · Updated [insert date]

In this article

1. The problem with letters of intent
2. The legal principle — when is a letter binding?
3. Quantum meruit — what the contractor can recover
4. Practical application — key questions for each party
5. Risks on both sides
6. Drafting checklist — six provisions every letter needs
7. Conclusion

Key takeaway

A letter of intent is not a safe harbour — it is a legal instrument with real consequences. Where it identifies an authorised scope, a value cap, and incorporates the intended contract by reference, it will usually be binding. Where it is silent on these points, the contractor may claim on a quantum meruit basis, and the employer may lose the protection of liquidated damages, retention and dispute resolution provisions.

1. The problem with letters of intent

Letters of intent are a daily feature of construction procurement in the UAE and internationally. They allow employers to authorise early works — mobilisation, long-lead procurement, enabling works — before the formal contract documents are finalised. In practice, they are one of the most poorly drafted instruments in the industry, and disputes arising from them are disproportionately common.

The core problem is inherent ambiguity. A letter of intent sits in the space between negotiation and contract. An employer drafting one typically wants to give the contractor enough authority to start work, without committing to a full contract before all terms are agreed. The contractor needs enough certainty to justify mobilising resources and incurring costs. These competing interests produce letters that are neither clearly pre-contractual nor clearly contractual — and disputes follow inevitably.

The most common scenarios that generate claims include:

• The formal contract is never executed.
• The works exceed the authorised scope or value.
• The letter contains no mechanism for valuing additional works.
• The formal contract, when executed, contains terms materially different from what the contractor expected.

2. The legal principle — when is a letter binding?

English law and most common law systems — including the UAE courts when applying common-law-derived principles of contract formation — recognise that a binding contract requires four elements: offer, acceptance, consideration, and certainty of terms.

A letter of intent that authorises specific works at an identified price, or within an identified cap, and that the contractor proceeds to perform, will ordinarily satisfy these requirements — at least as to those works. The obligation to pay may arise in contract (if terms are sufficiently certain) or in restitution (quantum meruit) if they are not.

This distinction matters. Under UAE Federal Civil Transactions Law principles of good faith and unjust enrichment, similar reasoning applies: a party that performs work at another’s request, without a complete contract, is entitled to reasonable remuneration — but not to the expected profit margin of a contract that was never formed.

3. Quantum meruit — what the contractor can recover

Where the letter of intent is silent on key terms and no binding contract is formed, the contractor’s remedy is restitutionary — assessed on a quantum meruit basis. The phrase is Latin for “as much as he deserves”. In construction, it translates to reasonable cost for work performed, assessed on a fair and reasonable basis at the time the work was carried out.

Quantum meruit recovery typically includes:

• Direct costs — labour, materials, plant and equipment actually employed on the works.
• Reasonable site overheads — supervision, site establishment, attendances.
• A proportion of head office overheads — where the work has occupied resources that would otherwise have been deployed on profit-earning projects.
• A reasonable allowance for profit — though this is often contested and is not automatic under a pure quantum meruit claim.

What is typically not recoverable under quantum meruit: loss of bargain on the unconcluded contract, consequential loss, contractual preliminaries that would have applied under the intended contract, or delay damages that would have been the subject of liquidated damages provisions.

For the contractor, this creates a counter-intuitive risk: a well-drafted letter of intent that incorporates the intended contract by reference may actually be more favourable than silence, because it preserves the contractual remedies for delay, disruption and variation.

4. Practical application — key questions for each party

For the contractor — before mobilising

Read the letter carefully before committing a single AED of resource. The questions that matter:

• Does the letter identify a cap on authorised expenditure?
• Does it incorporate the terms of the intended contract by reference?
• Does it contain a stop-work notice mechanism?
• What happens if the formal contract is not executed within a defined period?
• Is there a dispute resolution clause — or is the contractor forced into onshore litigation?

For the employer — before issuing

Ensure the letter does not inadvertently create open-ended liability. The questions that matter:

• Is there an authorised value cap, clearly stated?
• What happens if the cap is reached before the formal contract is signed?
• Are the intended insurance, liability and dispute resolution provisions incorporated?
• Is there a defined expiry date triggering either execution of the formal contract or termination?
• Is the scope described tightly enough to prevent the contractor performing — and then charging for — works outside the intended package?

5. Risks on both sides

A poorly drafted letter of intent exposes both parties to risks they would not face under a properly executed contract.

6. Drafting checklist — six provisions every letter needs

A letter of intent should be drafted with the same rigour as the contract it precedes. At a minimum, it must contain these six provisions:

Review the letter every 30 days. If the formal contract has not been executed, either convert it or extend it in writing — and do not let the authorised value cap drift upward through informal agreement. Repeated extensions erode the employer’s negotiating position and create precedent for open-ended commitment.

7. Conclusion

A letter of intent is not a safe harbour. It is a legal instrument with the same capacity to bind, and to expose, as the contract it precedes. The safest approach is to execute the formal contract as quickly as possible. Where a letter of intent is genuinely necessary — for long-lead items, critical-path enabling works, or political deadlines — it must be drafted with the same rigour as the contract itself.

The cost of a well-drafted letter of intent is trivial compared to the cost of the disputes that poorly drafted ones generate. For most UAE construction projects of any substance, an hour of careful drafting at the letter stage saves weeks of argument — and potentially millions in quantum meruit exposure — at the dispute stage.

Reviewing a letter of intent — or defending one in dispute?

Whether you are drafting the letter, mobilising under it, or arguing about what it committed you to, the same principle applies: get the analysis right early. A 30-minute case assessment is no-fee, no-obligation.

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