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Letters of Intent: Binding Effect and Legal Exposure in Construction
Letters of intent are meant to bridge the gap between tender award and contract signature. In practice, they are one of the most poorly drafted instruments in the industry — and a disproportionate source of construction disputes.
6 min read · Updated 21/04/2026
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By Basel Al Najjar Civil Engineering Consultant, DIAC Arbitrator, Tribunal Chairman and Accredited Expert Witness. Over two decades advising UAE contractors, developers and law firms on FIDIC, claims and arbitration. |
In this article
- Why letters of intent generate so many disputes
- The legal position — contract or restitution?
- British Steel v Cleveland Bridge — the leading authority
- What a well-drafted letter of intent must contain
- Risk exposure for employers and contractors
- Practical mitigation steps
- When to use a letter of intent — and when not to
Key takeaway
A letter of intent is a contract in substance even when the parties avoid the label. Where it authorises defined works at an identified value, the courts will ordinarily find a binding obligation. Where terms are uncertain, quantum meruit may produce an assessed figure higher than the anticipated contract price — but without loss of bargain or contractual damages for either side. The safest position is to execute the formal contract quickly, or to draft the letter with the same rigour as the contract itself.
1. Why letters of intent generate so many disputes
Letters of intent are a daily feature of UAE construction procurement. Employers issue them to authorise mobilisation, long-lead procurement and enabling works before the formal contract is executed. In principle, they are a practical bridge between tender award and contract signature. In practice, they are one of the most poorly drafted instruments in the industry and generate a disproportionate share of construction disputes.
The reason is structural. A letter of intent sits in the space between negotiation and contract. The employer wants to authorise the start of work without committing to a full contract before all terms are agreed. The contractor needs sufficient certainty to justify mobilising resources, placing purchase orders and incurring preliminary costs. These competing interests produce instruments that are neither clearly pre-contractual nor clearly contractual.
The recurring fact patterns in disputes are familiar:
- the formal contract is never executed and the works proceed to completion under the letter alone;
- the works exceed the authorised scope or value without any written variation;
- the letter contains no mechanism for valuing additional or changed works;
- when the formal contract is eventually executed, its terms differ materially from those the contractor assumed would apply.
Each of these scenarios steers the parties towards quantum meruit argument, negotiation at weakness, or formal proceedings.
2. The legal position — contract or restitution?
English law and the common-law-influenced construction jurisprudence applied to international contracts in the UAE recognise that a binding contract requires offer, acceptance, consideration and certainty of terms. A letter of intent that authorises specific works at an identified price — or within an identified value cap — and on which the contractor proceeds to perform, will ordinarily satisfy these requirements in respect of the works performed. The obligation to pay may arise in contract, where the terms are sufficiently certain, or in restitution on a quantum meruit basis where they are not.
Under UAE law, the position is broadly consistent in outcome. The UAE Federal Civil Transactions Law treats a contract as formed by agreement on the essential elements. Where the parties have not agreed on all terms but have acted on the letter, the courts will typically order reasonable remuneration for work actually performed at the employer’s request, applying principles equivalent to quantum meruit. The precise article relied upon depends on the factual matrix; a UAE-qualified practitioner should be instructed on any live dispute.
3. British Steel v Cleveland Bridge — the leading authority
The leading common law authority on works performed under a letter of intent is British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504. Cleveland Bridge issued a letter of intent to British Steel for the supply of cast-steel nodes. British Steel commenced manufacture. The parties never concluded the formal contract because they could not agree on essential terms — in particular, liability for late delivery. British Steel sued for the value of the nodes supplied; Cleveland Bridge counterclaimed for damages arising from alleged late delivery.
British Steel Corporation v Cleveland Bridge [1984] 1 All ER 504
Robert Goff J held that no contract had been concluded because the essential terms had never been agreed. British Steel was entitled to be paid on a quantum meruit basis for the value of the work performed at Cleveland Bridge’s request. Cleveland Bridge’s counterclaim for damages failed because there was no contract to sue upon.
Two principles follow from the decision and remain good law across common law jurisdictions:
- work performed under a letter of intent, pending a formal contract that never materialises, may be recoverable on a quantum meruit basis;
- quantum meruit does not necessarily include profit, loss of bargain, or other contractual remedies — a party cannot recover consequential or contractual damages where no contract has been formed.
The practical consequence for UAE practice is that a contractor paid on quantum meruit recovers a fair and reasonable value for work done, but loses the ability to claim loss of profit on the remainder of the intended contract. An employer, meanwhile, loses the ability to enforce liquidated damages, performance bonds, or other contractual protections that were never incorporated into the letter.
Facing a dispute over works performed under a letter of intent?
Whether you are the employer facing an open-ended cost exposure or the contractor seeking to recover what you are owed, the outcome turns on the precise wording of the letter, the works performed, and the conduct of the parties. An early expert assessment will often identify the strongest contractual position before the dispute hardens.
4. What a well-drafted letter of intent must contain
A letter of intent is a legal instrument and must be drafted as one. The following elements are the minimum any letter of intent should contain. Absence of any one of them materially increases the risk of subsequent dispute.
| # | Essential element | What it must state |
|---|---|---|
| 1 | Parties | Full legal names of the employer and contractor with authorised signatories. |
| 2 | Authorised scope | Specific works authorised under the letter — not an open-ended reference to the full project scope. |
| 3 | Value cap | Maximum expenditure authorised, expressed in AED. Works must stop when the cap is reached unless it is formally increased. |
| 4 | Intended contract | The contract form to be executed (for example FIDIC Red Book 1999 or 2017) and, where possible, incorporation by reference of its material provisions. |
| 5 | Stop-work mechanism | How and when the employer may instruct the contractor to stop, and what is payable on stop. |
| 6 | Dispute resolution | Governing law and forum for any dispute under the letter — ideally the same as the intended contract. |
| 7 | Expiry date | A fixed date on which the letter lapses unless the formal contract has been executed. |
5. Risk exposure for employers and contractors
Where a letter of intent is silent on key terms, the exposure runs in both directions. Neither party is protected by the machinery of the contract they intended to sign.
Employer exposure
- open-ended liability for works exceeding the anticipated contract price, particularly where no value cap is stated;
- inability to apply liquidated damages, because the formal contract provisions were never incorporated;
- no retention, performance bond or parent-company guarantee;
- no right to reject defective works on contractual grounds, because acceptance and warranty provisions were never agreed.
Contractor exposure
- inability to recover prolongation, disruption, acceleration costs or loss of productivity, because these claims depend on contractual machinery that was never incorporated;
- inability to rely on extension-of-time provisions, because a letter of intent rarely contains a programme or a Time for Completion;
- exposure to quantum meruit assessment at “fair and reasonable” rates, which may be lower than tendered rates where the contractor’s price was aggressive;
- a weakened negotiating position once works are substantially under way, because withdrawing is no longer commercially viable.
6. Practical mitigation steps
Both parties should adopt the following discipline when a letter of intent is genuinely required:
- Draft the letter with the same rigour as the formal contract. Identify scope, value cap, intended contract, incorporation terms, stop-work notice provisions, dispute resolution and governing law.
- State an expiry date. A letter of intent without an expiry date encourages drift into open-ended performance.
- Review progress every 30 days. If the formal contract is not signed, either the cap must be increased formally or the works must stop.
- Issue written variations for any works outside the authorised scope, even while the formal contract is still being negotiated.
- Do not extend the letter repeatedly. Each extension erodes negotiating position and creates precedent for open-ended commitment.
- Keep a contemporaneous record of instructions received, works performed and costs incurred. This record becomes the evidential basis for any subsequent quantum meruit or claims assessment.
7. When to use a letter of intent — and when not to
Legitimate uses of letters of intent are narrow but real. They include authorising the placement of long-lead procurement orders where critical-path equipment must be ordered before the contract is finalised; authorising limited site mobilisation where the programme cannot accommodate further delay; and authorising design-development works ahead of the formal appointment of a consultant.
Letters of intent are inappropriate in three common situations. First, where the full scope is already agreed and the contract is simply awaiting signature — in that case the solution is to sign the contract, not to issue a letter. Second, where the works are short-duration and a simple purchase order would suffice. Third, where the parties are still negotiating material terms such as price, programme or liability — here the letter is a placeholder for unresolved disagreement, not a bridge to an imminent contract, and it is almost certain to produce a dispute.
A letter of intent is not a safe harbour. It is a legal instrument with real consequences. The cost of drafting one well is trivial compared to the cost of the disputes that poorly drafted ones produce.
This article is general information and does not constitute legal advice. Parties facing a live dispute arising from a letter of intent should take advice from a UAE-qualified legal practitioner on the specific facts and applicable jurisdiction.
Related reading
|
Contract Quantum meruit in UAE construction disputesHow restitutionary claims are assessed where no contract has been concluded, and why the figure can exceed the tendered price. |
Contract Letter of Award vs Letter of Intent: the binding distinctionThe two instruments are routinely confused. The difference in legal effect is decisive, and the drafting implications matter. |
Contract Pre-contract works and employer liabilityWhere an employer authorises works before contract execution, what is the extent of liability if the contract is never signed? |
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