A letter of intent is a pre-contractual letter from a prospective principal notifying a prospective contractor (tenderer) that the principal intends to award the contract to the contractor. A letter of intent will generally not bind the principal to either proceed with the contract or to pay the contractor for work it does in reliance on the letter. It is merely the principal’s written intention to enter into a contract at a future date and subject to its specific terms has neither binding effect nor creates any liability in regard to the future contract (Turriff Construction Ltd v Regalia Knitting Mills Ltd (1971) 9 BLR 20). It does not amount to an offer that can be accepted by the contractor, since key terms remain to be negotiated (Abigroup Contractors Pty Ltd v ABB Services Pty Ltd (formerly ABB Engineering Construction Pty Ltd) [2004] NSWCA 181).
If work is undertaken due to a request in a letter of intent, then payment may be claimed for quantum meruit (reasonable remuneration) (British Steel Corporation v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504)). (See also Chapter 3 – Managing the main risks of tendering.) Generally, however, no claim can be made for breach of contract, since there is no contract.
However, a letter of intent may create a binding contract where it includes the key terms and satisfies the elements of agreement including consideration, capacity, intention and formalities as described above (Diamond Build v Clapham Park Homes [2008] EWHC 1439 (TCC)). Terms as to payment for any work performed and the basis for payment may be included to rebut an assumption of entitlement to quantum meruit. It should also state that the terms of the letter of intent are to apply to the main contract work if no formal agreement is ever reached (Monk Construction Ltd v Norwich Union Life Assurance Society (1992) 62 BLR 107).
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- Why Letter of intent in construction or any other trade?
- Letter of Intent in construction?
- LOI binding or non-binding?
- Letter of intent Sample (LOI sample)
- Construction LOI-Case Study
Why Letter of intent in construction or any other trade?
The Letter of intent in the construction industry? The Letter of intent or the Letter of interest is a highly controversial subject in the construction industry. People always mixed up the Letter of intent with Letter of award (LOA), Comfort letter or Contract awarded Letter. But usually, Letter of acceptance or Contract awarding Letter is issued after the negotiation process and after all the parties are agreed on the terms & conditions, payment plans etc. As a Quantity Surveyor, it is essential to identify differences between these letters.
But the Letter of intent (LOI) is there because to reduce the engineering and processing time of the work or delivery. If the buyer has a concern about the time frame and the terms & condition are not agreed between the buying party and selling party (this can be Client & contractor in construction). The buying party can issue a letter of intent (LOI) to convince the selling party.
And selling party(building party) can arrange material and start the initial building or manufacturing process based on the LOI until all the negotiations are finalized.
LOI binding or non-binding?
Most of the time, LOIs are treated as a non-binding agreement between two parties. LOI gives prefatory commitment of one party to do business with another party. Letter of intent can be issued in the recruitment process (when an organization is willing to recruit new employee, they can issue an LOI for employment).
But in a good LOI should describe the following things to minimize the disputes between both parties.
- Payment terms
- invoicing schedule (intervals and procedures for the payment applications)
- Work scope (should Mention clearly with limits and exclusions)
- Date of completion etc.
Letter of intent Sample (LOI sample)
Effective Date: ________________________________________________
Letter of intent to construct (______________________ )
We (Issuers company name) issued this letter expressing our intention to award the contract for the construction of the (______________project name) at (____________Location) to you. Herewith, You are advised to proceed on the following work immediately, all under the quotation (quotation ref) you submitted on (date of the quote).
Work should be executed accord with the building permit drawings dated {drawing dates} and the Specifications dated {specification date} as prepared by {architect or designer name}. This letter will form an interim agreement between {contractor name} and {owner name} until the ongoing negotiations have concluded with either a formal contract.
1. The Contractor: ______________________ (“Contractor”).
2. The Client: ______________________ (“Client or Main contractor”).
3. Work scope: Contractor agrees to provide the following services/ any other exclusion etc:
______________________________________________________ (“Services”).
4. Payment terms: Main Contractor/Client shall pay the Contractor the following:
$______________________ for the Services (“Payment”) as per the submitted quotaion ( Quotaion reference).
Payment terms-__________________________________
5. Work commencement Date: Contractor shall be permitted to commence the Services on ______________________ 20____ (“Commencement Date”).
6. Work Completion Date: Contractor should be complete the works or services on ______________________ 20____ (“Completion Date”)
7. Governing law_____________________________________
We (contractors name) here by agreed to all terms and conditions above on this and agreed to carry out works as mentioned above.
Contractor’s Signature ______________________ Date ______________________
Authorized signatory ______________________
MAIN CONTRACTOR/ CLIENT
Signature ______________________ Date ______________________
Authorized signatory ______________________
Construction LOI-Case Study
As per Below case between Tesco vs Costain (1980) clearly shows, why Letter of intent in construction without the above vital points can lead to disputes. Tesco has issued a Letter of intent to costain to build a new store. The LOI is stating that costain should be carried out the works as a Design & built work based on the Tesco standard. Costain is completing the project without any other formal contract except the LOI mentioned above.
After some years suddenly fire broke out in the building. And Tesco is claiming that Costain’s incompetence design measurement is the reason for the incident.
But Costain is pointing out that since there is no formal contract during the construction, they were not responsible for these excess damages. However, the Court has decided that the sign LOI as a contract between the parties. But this did not extend to Costain having liability for the designs subsequently produced.
Therefore what we suggest without searching in the LOI sample or Letter of interest sample on the internet, it is better to concentrate on the above key points whenever you are issuing an LOI
Need more insight? or Bored in reading about the Letter of intent in construction-check this Youtube video by Howcast