Letters of Intent, Lies and Damn Lies

There are no prizes in life for being lazy and/or stupid. I know these are strong words but if you are in the habit of issuing letters of intent, or even worse, used to relying on them to undertake work, then you may be taking on unnecessary risk that could lead to some rather unpleasant consequences for your organisation.

There are legitimate times when it is not possible or even desirable to enter into a formal contractual arrangement incorporating the plethora of express terms that are designed to regulate an agreement between two parties. So, in certain circumstances, it may be necessary to take a short cut, cross those fingers and toes and begin work without the protection of a formal contract.
Having taken that leap of faith, do you know where you stand if things take a turn for the worse and your client responds to a request for payment with a two-fingered gesture?
Most letters of intent start with the all too familiar words “we confirm it is our intention to enter into a contract with you for….”. If this is all the letter says then, as far as a contractual obligation to pay you is concerned, it is about as much use as a chocolate fire guard; i.e. not very! An expression of an intention to do something in the future is simply not binding on a party.
A binding letter of intent should not be shy about telling you what the issuer wants from you and what you may expect in return. DON’T assume anything. If the letter does not confirm a right, the right does not exist.
You might say that it is custom and practice for Sub-contractors to receive interim payments as the work proceeds but, without such a provision in the letter of intent, who says that you are entitled to interim payments?
What standard are you working to? Is it a third party’s specification? Are there drawings? What if you end up in dispute? What if the contract is cancelled? Where do you stand? Do you see how things can spin out of control so easily?
Now think about the hard economic terms we are all operating under. Desperate companies, just like desperate people, do desperate things. In the last six months I have seen a worrying trend of unscrupulous Contractors playing serious hard ball with Sub-contractors who have relied on the “chocolate fire guard” version of a letter of intent, only to find that they cannot get paid or have to sign up to quite ridiculous contract terms in order to obtain payment for work done up to that point. 
If you believe that you have to take these sorts of chances, and wish to avoid a financial disaster, please think about taking some basic precautions. 
To have any realistic chance of enforcing payment for work done under a letter of intent, as an absolute minimum, the letter of intent should contain all of the following features:
  • A clear instruction to proceed with a defined list of work(s) to a defined standard or specification
  • Confirmation on what basis you are to be paid for the instructed work and when
  • A mechanism for providing you with interim payments as work proceeds
  • Confirmation that if a contract is not concluded, for whatever reason, how the sum you are entitled to be paid is to be calculated and when payment of any final balance due to you will be made
  • A provision allowing you to refer a dispute, arising out of or in connection with the letter of intent, to adjudication adopting the rules contained within the Scheme for Construction Contracts (England and Wales) Regulations 1998.
If the letter of intent is missing any of these fundamental provisions, you might want to question whether working under the proposed arrangement is really such a good idea.
If you decide to proceed in the absence of these fundamental provisions and the beneficiary of your hard work turns nasty and refuses to pay, please don’t be staggered by the costs of sorting the ensuing mess out in the courts. You really only have yourself to blame.
Peter Vinden is a practising adjudicator, mediator, expert and conciliator.  He is Managing Director of Vinden and can be contacted by email at pvinden@vinden.co.uk
Peter Vinden

Peter is an experienced professional in the construction industry with particular expertise in quantity surveying and the commercial management of contracting organisations.