Letters of Intent — Binding Effect and Legal Exposure

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

The Problem

The core problem with letters of intent is their inherent ambiguity. They sit in the space between negotiation and contract. An employer drafting a letter of intent typically wants to give the contractor enough authority to start work, without committing to a full contract before all terms are agreed. The contractor, meanwhile, 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; or the formal contract, when executed, contains terms materially different from what the contractor expected.

The Legal Principle

English law and most common law systems 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 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.

The leading principle, confirmed in British Steel Corporation v Cleveland Bridge [1984] 1 All ER 504, is that work done under a letter of intent pending a formal contract that never materialises may be recoverable on a quantum meruit basis, but that quantum meruit does not necessarily include profit or other contractual remedies. Parties cannot recover loss of bargain under a quantum meruit claim.

Practical Application

Contractors must read letters of intent carefully before committing resources. Key questions include: Does the letter identify a cap on authorised expenditure? Does it incorporate the terms of the intended contract? Does it contain a notice to stop? What happens if the formal contract is not executed?

Employers must ensure that letters of intent do not inadvertently create open-ended liability. An authorised value cap is essential. The letter should specify what happens if the cap is reached before the formal contract is signed, and should incorporate by reference the dispute resolution, insurance, and liability provisions of the intended contract.

Risks

Where a letter of intent is silent on key terms, the contractor may claim on a quantum meruit basis with costs assessed on a fair and reasonable basis — potentially more than the contract price. The employer may find they have no mechanism to apply liquidated damages, retention, or performance obligations, because these were never incorporated. The contractor, conversely, may find they cannot recover delay costs, acceleration costs, or loss of productivity if these are not referenced in the letter.

Mitigation

Draft letters of intent with precision: identify the authorised scope, the authorised value, the contract to be incorporated by reference, the stop-work notice provisions, and the dispute resolution mechanism. Review letters every 30 days and update or convert to a formal contract as soon as possible. Avoid extending letters of intent repeatedly — this erodes the employer’s negotiating position and creates precedent for open-ended commitment.

Conclusion

A letter of intent is not a safe harbour — it is a legal instrument with real consequences. The safest approach is to execute the formal contract as quickly as possible. Where a letter of intent is genuinely necessary, 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.