Letters of Intent - Beware of the Risks

In a perfect world, work on a construction contract should not commence before a full and complete contract has been executed by the parties. It is, however, often desirable for work to commence before the formal agreement has been signed. In such circumstances, it is common practice to issue a letter of intent to enable the selected contractor to start work. Whilst this is a convenient solution to bring the contractor on board as early as possible, letters of intent are sometimes problematic and subject to dispute. Disputes can arise over the interpretation of the obligations of the parties, such as whether the letter of intent has created a binding agreement or not. A letter of intent is fundamentally an agreement by the parties today to enter into a contract in future, with the expectation that the parties will reach agreement on the terms and conditions of that future agreement. In the case of Turriff Construction Ltd v Regalia Knitting Mills (1971), the courts expressed the general rule that a letter of intent is “the expression in writing of a party’s present intention to enter into a contract at a future date” and that only in exceptional cases would it have a binding effect (Turner 2010). In the more recent case of Diamond Build Ltd v Clapham Homes Ltd (2008), the courts identified three types of letters of intent. The first is a “pure” letter of intent, the second is a simple contract which is intended to be superseded by a formal contract and the third is a whole contract with no intention of a future contract.