‘Disaster looming’ are our first thoughts at Contract Rite when hearing the sentence “we are working under a Letter of Intent (LOI)”, this is because many disputes arise through works being carried out under a Construction LOI and the question to ask is ‘is the LOI actually a binding contract?’

Firstly what do the words within the Construction Letter Of Intent state? Generally it is along the lines of “it is our intention to enter into a contract with you…” Some requirements of a basic binding contract are:

Agreement via offer and acceptance of certain terms

and

Consideration which is the exchange of something of value (generally scope in exchange for money in construction).

Under a LOI some of the basic binding contractual requirements have not been defined and therefore determine that the LOI is not actually a contract. This is a disaster for a contractor who has commenced works under the LOI as they may very well find out that they have gifted all works to the other party, with no method of payment or recovery!

What to look out for when receiving a Letter of Intent?

We’ve outlined some of the minimum requirements below:

1. Details of both parties and a definition of each parties role under the LOI (example: “Contractor” and “Sub-Contractor” with company numbers and addresses).
2. Agreed scope of works to be carried out under the LOI (example: “carry out the detailed design works as per the sub-contractors quotation ref ABC”).
3. Agreed price for works carried out under the LOI (example: £10,000.00 + VAT).
4. Promise to pay for all works carried out under the LOI (example: the contractor shall pay for all works completed by the sub-contractor under this LOI whether the full order is issued to the sub-contractor or not).
5. Payment Terms under the LOI (example: payment shall be made under this LOI in accordance with the attached JCTDBSub 2016 which the contract would be awarded under).
6. Instruction of LOI by signature of both parties (example: both parties sign and date the LOI).
7. Programme requirements of both the LOI and the full project (example: the LOI start date is 6th April 20XX and all works detailed within this LOI are to be completed by 15th June 20XX in line with the project programme as attached document XYZ).
8. Confirmation of LOI Terms and Conditions (example: the LOI Terms and Conditions shall be in line with the attached JCTDBSub 2016 which the contract would be awarded under).
9. Confirmation that it is agreed that the LOI is for all intents and purposes defined as a construction contract and shall be treated as such under any event. The reason for this is if it is determined that the sub-contractor cannot demonstrate the existence of a formal construction contract then they may be denied access to the construction act, resulting in no remedy for dispute resolution.

However even if the LOI details the above, check the LOI for any counter offers, additional conditions, details within the contract of payments not being required, satisfaction clauses, etc. as these may veto the above.

It is better to be professional and carry out your due diligence at the outset of the project even if this is seen by the other party as being contractual. The alternative is that you could end up working for the other party for free! Don’t get caught out, talk to our specialists today…