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No. 91. 1998 Editor: Peter Harlow

E-mail: pharlow@ciob.org.uk

THE EFFECTS OF LETTERS

OF INTENT
by J. B. McGuinness

BSC, MSc, FCIOB

Professional Services
The Chartered Institute of Building
Englemere
Kings Ride
Ascot
Berkshire
SL5 7TB

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Editorial Note

by law and that it is the party issuing the

2. Another form of letter of intent is to

This paper won the 1997 Hudson

prize awarded by the Society of
Construction Law.

letter of intent who is more often at risk.

allow a contractor or sub-contractor to start

One of the main reasons for starting a

preliminary work such as design,

contract under a letter of intent is to reach a

procurement and/or mobilisation. In these

more advantageous agreement before

circumstances a limit on spending may be

Entries to the 1998 Prize are invited

on a topic concerned with
construction and engineering
contracts, contract administration,
claims, arbitration and dispute
resolution, litigation, torts, company
law, property law, taxation and any
other aspect of law or procedure
relevant to construction.

concluding a contract; in practice delay will

set, so as to limit the liability of the

in most instances have the reverse result.

procuring party. The letter may also define

There are two prizes awarded

valued at 1500 and 750. Entries
should not exceed 5000 words and
should be submitted to the Societys
Membership Administrator, 67
Newbury Street, Wantage, Oxon,
OX12 8DJ by 30 September 1998.

WHAT IS A LETTER OF INTENT?

John started his career as an articled pupil

with John Laing and subsequently was
sponsored for a Building degree at Aston
University He has worked for the Laing
Group for over 25 years in site
management roles and has been involved
with a number of large prestigious projects,
including the Falkland Islands Airport and
the new British Library.
In 1992-94 John took a part-time course in
Construction Law and Arbitration at Kings
College, London.

the method of costing the work, as actual or

It will be shown that it is not necessarily the

proven costs. Such a letter may be phrased

act of issuing a letter of intent that leads to

as follows:

difficulties in determining the status of the

Please take this letter as our intention to

arrangement between the parties but also

enter info contract with you for the XXX

their action afterwards.

work. You are required to commence

design work immediately, up to a value
of LLL. In the event of no contract being
finalised between us we undertaken to
pay all reasonable and proven costs

A letter of intent is distinguished from other

incurred.

ineffective or unconcluded contractual

proposals in that there will normally have

These conditions can vary considerably. For

been on enquiry sent out by the purchaser

instance they may state implicitly that terms

and a tender submitted by the supplier.

The tender is likely to have been qualified so

and conditions are to be agreed or that

there is no intention to create legal or

as not to be open to acceptance. Post-

contractual

followed. At some point, when the

purchaser wishes work to start, he will write

THE PROBLEM

to the supplier requesting he commence the

work in whole or in part and undertaking

In the event that the contract or sub-contract

some obligation, usually to pay money, if

is concluded shortly after the issue of the

letter of intent, then there is unlikely to be

the supplier does as requested.

any resultant problem. However, where

This situation can be distinguished from

there is a significant delay between the issue

cases such as Felthouse -v- Bindley, where

of the letter of intent and the execution of the

performance was by the party writing and

contract or sub-contract the chances of a

the second party was to be liable for the

successful conclusion become less and less

consideration.

likely, since the contractor or sub-contractor

will

FORMS OF LETTERS OF INTENT

It is a feature of modern building contracting

that a significant number of both main and
subcontracts are let under a letter of intent,
the intention being to conclude a written
contract shortly afterwards. Of those
projects which start with a letter of intent a
high percentage will never be concluded
and the work will be completed without an
agreement being reached as to the contract
terms and conditions.

able

to

obtain

more

surprisingly little commentary in the legal

texts. Keating only devotes a page to
letters of intent and Hudson a page and a
half. Both make the point that the extent of
depend

on

the

facts/circumstances of the case. This is of

little help to contractors or sub-contractors
who finding themselves with a contractual
problem need advice as to their obligations
and rights. Despite this lack of comment
there is, however, a reasonable body of
case law, which can be analysed to reach
some fairly clearly defined principles.
It is generally been held that a contractor or
sub-contractor, who undertakes work under
a letter of intent does so at risk. This paper
demonstrates that this view is not supported

resist pressures to accept unattractive

liabilities. Either party will only be deterred

A letter of intent can come in various forms

from holding out if convinced that the

in response to differing needs of the

position is insecure without the backing of a

purchaser.

formal contract. However, if a late

agreement is reached and a contract

1. It is quite common, especially with sub

contracts, for the main contractor when he

signed, then there may arise issues as to the

conditions under which the early work was

has concluded his negotiations to issue a

carried out.

works order for the sub-contracted work.

Typically such an order will state:
It is our intention to accept your tender

Despite its frequency of occurrence there is

will

feel

advantageous bargain or better able to

INTRODUCTION

liability

relations.

tender discussions will probably have

for the XXX work on this contract. Please

It appears to be unusual for a contract is

terminated because the parties fail to agree.
The normal situation is that work continues

take this order as an instruction to

under the letter of intent for the whole of the

commence work pending the finalisation

works. Settling claims and disputes where

of the contract documents for signature.

the terms and conditions are those of an

executed standard form of contract can be

The sub-contractor may be required to sign

difficult, but are as nothing to the potential

and return the order form, which may

expressly be a prerequisite to the sub-

problems where no agreement has been

finalised.

contractor being paid for any work carried

out.

Finally, there is the matter of the rights of the

parties to terminate their involvement in the

In these situations the terms and conditions

will have been agreed between the parties,

project and the right of the other party to

damages if they do so.

but the main contractor will need time to

finalise the documentation, which company
procedures may require to be checked by
the purchasing manager and/or signed by
a director, prior to issue to the subcontractor.

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WHEN IS THERE A CONTRACT UNDER

A LETTER OF INTENT?

WHEN IS THERE AN ORDINARY

EXECUTORY CONTRACT?

reduction in the period of payment,

agreed to by their conduct.

being the last issue to be resolved

between the parties and was further

In the Court of Appeal judgement in Monk

Where the supplier signs and returns the

Construction Ltd -v- Norwich Union Life

letter of intent, or an attachment accepting

Assurance Society 62 BLR 107 Lord Justice

Neill reviewed the judgement of Mr Justice

the letter then it must be certain that there is

a binding contract between them. In the

(1996) CILL 1196 it is suggested that a

Goff in British Steel Corporation -v-

case of Ben Barrett & Son (Brickwork) Ltd -v-

binding contract can be formed where there

are still matters to be agreed:

In the case of Mitsui Babcock -v- John Brown

Cleveland Bridge and summarises the result

Henry Boot Management 1994 ORB 298

of a letter of intent as giving rise to three

the defendant claimed that the letter of

My review of the authorities leads me to

possible situations:
There may be an ordinary executory

intent, which was signed by the plaintiff,

the conclusion that there is no reason in

constituted a contract between them. It was

principle why two parties should not

held:
On the evidence, the Court found that

enter into a binding agreement, if that

there was clear evidence that the parties

objectively determined, even though they

intended to enter into a sub-contract and

contract, under which each party

assumes reciprocal obligations to the
other.

was their intention, which is to be

There may be what is sometimes called

an if contract, ie a contract under which

no evidence to support the contention

have agreed that some proposed terms

should be the subject of further discussion

that they did not intend there to be a sub

and later agreement.

A requests B to carry out a certain

contract until the main contract was

performance and promises B that if he

does so, he will receive a certain

signed.

The Judge went on to say:

I do not consider that any binding

performance in return, usually

However, if work carries on as requested by

contract was concluded by JEBs letter of

remuneration for his performance.

the letter of intent then whether there is or is

intent.

not a contract will depend on the wording of

No contract exists - if, no contract was

the letter.

entered into, then the performance of

The Judge does not suggest under what

circumstances a letter of intent, the subject of

work is not referable to any contract, the

A major factor in deciding whether the effect

terms of which can be ascertained and

the law simply imposes an obligation on

of a letter of intent an acceptance, becomes

binding agreement. In the event he finds

an enforceable contract will be the extent

matters still to be resolved are listed in the

that there is a concluded contract in writing,

letter. That the law does not recognise a

contract to negotiate, was decided in

appear still to be agreed:

In the light of the history of the dealings

the party who made the request to pay a

reasonable sum for such work as had
been done pursuant to that request.

further agreement, could be held to be a

despite there being certain matters that

Courtney & Fairbairn Ltd -v- Tolaini Brothers

between BEL and JBE leading up to the

This analysis is preceded by the observation:

(Hotels) Ltd (1975) 2 BLR 97. In this case

signing of the contract documents, the

As a matter of analysis a contract (if

any) which may come into existence

there was a clause in the supposed contract

to negotiate fair and reasonable contract

immediate circumstances surrounding the

signing and the fact that both- the parties

following a letter of intent.

sums. Inevitably the negotiations failed and

did sign the contract documents, I have

the builder sued for the cost of the building

come to the conclusion that both parties

work. Lord Denning commented:

did intend to conclude a binding

Since a letter of intent is in effect an offer to

a supplier to commence work ahead of a

If the law does not recognise a contract

agreement when the contract documents

contract being formalised, a letter of intent in

to enter into a contract (when there is a

were signed.

itself never establishes a contract. There

fundamental term yet to be agreed) it

must be some form of acceptance by the

seems to me it cannot recognise a

There then follows a detailed argument as to

supplier for a contract to come into

contract to negotiate.

why an agreement as to the method of

existence.

testing could be taken as reaching

agreement on manufacturing tolerances.

This view is supported by other judgements

While the existence of terms still to be

agreed in a letter of intent leaves the parties

such as that in Mifflin Construction Ltd -v-

in a non-contractual situation, the situation

Netto food Stores Ltd 1993 ORB 66.

may well change as a result of further

in the main contract for the appointment of

sub-contractors, failure to follow these may

intent was that it was an offer capable of

agreement. In VHE Construction -v- Alfred

McAlpine Construction ORB 1995 No.

acceptance by the plaintiffs.

1114 the Judge found:

effect. In Sir Robert McAlpine Management

In my view the true nature of the letter of

There are some eight items which

If there are specified requirements laid down

be a bar to a works agreement coming into

Contractors Ltd -v- London Demolition (UK)

In Hall & Tawse South Ltd and Ivory Gate Ltd

appear to need resolving, being:-

Ltd 1990 ORB 1298 the judge was satisfied

this was stated more forcibly:

measured rates, clause on contract

that it was a condition precedent to an

enforceable contract that it should be under

A letter of intent is usually an unilateral

charges, daywork rates, drainage

assurance intended to have contractual

arisings, vent trench arisings, discount,

seal. Further, the parties did not intend there

effect if acted upon, whereby reasonable

programme, responsibility for damage to

services and the source for the

to be a contractual relationship until the

expenditure reasonably incurred in

reliance upon such a letter will be
reimbursed. Such a letter places no
obligation on the recipient to act upon it

formal documents were executed.

importation of materials.
Contract documentation, sent to a supplier
Negotiations between the parties continued

and there is usually no obligation to

in parallel with construction work and

continue with the work or to underfake

any defined parcel of work, the recipient

eventually the final matter was agreed. It

who is acting under a letter of intent, if

rejected on the grounds that it does not
represent an agreement between the parties,
cannot be held to be evidence of a

being free to stop work at any time. The

was held that at this point a binding contract

had been concluded:

effect of such a letter is to promise

A sub-contract was completed by a

Contractors Ltd -v- Balfour Beatty Buildings

reasonable reimbursement if the recipient

telephone call between Mr Brown and

Ltd (1991) 8 CLD 05-04:

does act upon it.

Mr Brian Thomson in late February or

Balfour wrote to Kitsons, purporting to

early March when they agreed a

accept the revised tender and enclosed

concluded contract. In Kitsons insulation

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sub-contract documentation, which did

It was held that the contractors right to

defined and contracted for in the letter of

not reproduce the subcontract which had

payment for the completed work was not to

intent.

been summarised in the earlier letter of

intent. It did, however, purport to

be based on his tender and the conditions

he had been required to tender against, as

In Monk Construction Ltd -v- Norwich Union

include all the variations to the sub-

would hove been the case if, as was

life Assurance Society 62 BLR 107, this

contract works which had been

expected, the contract had been concluded.

situation arose. The letter of intent

proposed since the date of the letter of

Instead, the entire contract conditions were

contained in the brief words of the letter of

contained the following words:

Our client has instructed us to confirm

intent read in isolation from the tender and

subsequent negotiations and in a literal

that this letter is to be taken as authority

for you to proceed with mobilisation and

manner. Although this case only concerned

ordering of materials up to a maximum

the method and procedures of valuation

expenditure of

intent. Kitsons refused to undertake the

sub-contract in that form, and no forma/
sub-contract was ever executed by them.

WHAT CONTRACT IS CONCLUDED BY

THE LETTER OF INTENT?

100,000.

there is no reason to believe the same

situation could not arise with regard, to say,

In the event that our client should not

programme.

conclude a contract with you, your

Where the parties have reached agreement

entitlement will be limited to the proven

as to the terms of the contract they wish to

The restrictions of such a letter of intent

costs incurred by you in accordance with

conclude and they sign an interim document

would affect both parties. There would be

the authority given by this letter.

while the formal agreement is being

no place for a third party such as a contract

prepared, then the contract brought into

administrator or engineer. There will be no

In the event no contract for the construction

effect by the signing of the letter of intent

entitlement to make variations, no due date

work was concluded, but Monk completed

should reflect the intentions of the parties.

for completion and no liquedated and

the building. Monk sought payment for the

There may be one significant exception to

ascertained

work, but Norwich Union claimed that the

this. Where the intention is for the contract

to be under seal, with the resulting 12 year

It should also be appreciated that

limitation period, it may be that until the

contractors frequently use the word

formal agreement is signed the contract is

under hand, with only a 6 year limitation

contract loosely to mean both the works or

Appeal upheld the judgement at first

instance that the words of the letter of intent

project. In many letters of intent, such as in

were limited to the work done under its

period.

Sims the intention may have been to allow

authority and even then only if the supplier

damages.

entitlement was limited to proven costs, as

stated in the letter of intent. The Court of

for a situation where Sims did not continue

did not proceed to carry out the construction

Where agreement has been reached on

with the construction work and was not to

work.

only some of the terms of the intended

relate to the contract in the legal sense.

contract, then great care must be taken with

the drafting of the letter of intent if the

It is important to distinguish the situation in

Lord Justice Neill made the following

comments in his judgement:

benefits of the agreed terms are not to be

Sims where the letter of intent was for the

One then turns to the third and fourth

lost.

whole work to be subject of the contract,

paragraphs of the letter of intent on

from letters of intent requesting the

which Norwichs case on proven costs

One option frequently employed is to couch

commencement of early activities, such

principally rests.

the letter of intent in general terms, such as:

the ordering of materials.

OS

In the event of the contract not being

finalised, the contractor will be paid his
costs. When a letter such as this is written

It seems to me perfectly clear that these

two paragraphs were directed to a

LETTERS OF INTENT FOR INITIAL

WORKS ONLY

problem which might arise if for some

parties to part company. In practice the

Where the procurement process is running

concluded between the parties.

frequent outcome is that the negotiations

make little progress and the work is

out of time it is common practice to request,

under a letter of intent, the preferred

The letter further provided that if

constructed under the letter of intent.

tenderer to commence his initial or advance

Norwich did not conclude a contract

works. These may include a request to

with Monk, Monk could claim for the

the intention is to resolve the outstanding

matters and finalise the contract or for the

reason no contract for the execution of

the Sub-Structure Phase II work was ever

In these circumstances the contractor may

prepare drawings, place on order items on

proven costs which they had incurred in

find himself bound to an unintentional

long delivery, reserve equipment of a

accordance with the authority given to

contract which, had he realised the resulting

specialist nature and/or set up on site. The

consequences, he would never have

letter of intent will set out the obligations of

them to mobilise and to order a certain

quantity of materials.

accepted. In C J Sims Ltd -v- Shaftesbury Plc

60 BLR 98, His Honour, Judge Newey QC

the purchaser if the supplier responds to this

request. As described above if the supplier

found that the letter of intent contained the

responds by carrying out the work as

In my view the provision for the recovery

of proven costs was intended to deal

following statement:
In the unlikely event of the contract not

requested then a contract for that work and

that work only comes into being. The terms

with the situation if no contract was

signed and if no work on the Sub-

proceeding, (the plaintiffs) will be

of that contract are those as stated in the

Structure Phase II project (apart from

reimbursed their reasonable costs which

letter of intent.

have been and will be incurred and costs

for which they are liable including those

mobilisation and the ordering of some

materials) was carried out by Monk.

This arrangement should give rise to no

of their sub-contractors and suppliers,

difficulties, if either a contract for the

I agree with the Judge that the proven

such costs to include loss of profit and

construction works is subsequently

costs formula was never intended to

contributions to overheads, all of which

concluded or the parties decide that they

apply to the execution of the main

must be substantiated in full to the

reasonable satisfaction of our quantity

cannot reach agreement after all and part

contract, nor was it intended to apply if

company. However, a not uncommon

situation is that no agreement for the
construction work is concluded, but the

work on the main contract began.

surveyor.
In the event the contract was not concluded.

supplier continues beyond the work as

In my judgement the Judge was correct

to conclude that Monk were entitled to

be remunerated on the basis of quantum

binding contract at an early moment is their

The correct approach when considering

meruit.

aim, there will be many circumstances where

the effect of a letter of intent is to look for

the purpose of construing it at the

the intention is not to proceed into a formal

project or its costs until certain special needs

document itself, at the surrounding

circumstances, and of what happened

are met or decisions are made. Such

when it was brought into existence. The

circumstances may include the obtaining of

planning or other approvals, the securing of

has does not brand it as the outset as a

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relationship and/or a commitment to the

LETTERS OF INTENT FOR THE WHOLE

WORKS
Because the letters of intent are intended to
be an interim measure, pending final

fact that it has the particular label that it

the necessary funds, the completion of

contractual document or as a non-

agreement they will rarely be issued for the

feasibility or other studies.

contractual.

entire works. The case of Hall &, Tawse

South Ltd -v- Ivory Gate Ltd 1996 ORB No.

In Peter Lind & Co Ltd -v- Mersey Docks and

To begin with, the letter of 25 November

Harbour Board 2 Lloyds Rep.234 the

contract could not be concluded until the

is headed Subject to Contract. In this

instance, I believe that those words were

1612 was different in that it required the

contractor to commence the works. The
letter is quoted in full in the judgement but
significant parts are as follows:

Board had approval under the Harbours

intended to mean what they say, and the

Act. The letter of intent merely stated:

parties had no reason to think otherwise.

We confirm that it is our intention to

enter into a formal contract in the form of

the Board and it is their intention to

The decision of the Judge to look at the

the Standard form of Building Contract.

accept your tender when all the

document itself, at the surrounding

circumstances, and at what happened when

Your tender was the lowest received by

necessary formalities have been

The conditions attaching to your

completed.

appointment are:
By the time the defendants were able to

it was brought into existence shows a very

different approach to that used when
construing a contract. This is very obvious

(a) That the form of the Building

enter into contract, circumstances had

in Sims -v- Shaftesbury where it was common

Contract and escrow agreement are to

changed and the plaintiff sought to revise his

ground that:

be agreed as soon as practicable.

price. It was held no contract was

concluded as the parties were still in

The Defendants letter of intent followed

by the Plaintiffs commencemenf of work

We are now instructing you to

negotiation on the question of price.

on site gave rise to a contract between

commence the Works to be carried out

them.

under the Building Contract, including the

One commonly used approach is to impose

ordering of materials necessary to the

a limit on expenditure under the letter of

intent that you shall use your best

intent. In Monk -v- Norwich Union, the letter

under Order 14, the Judge did not consider

endeavours to achieve the contract

of intent said:

whether a contract existed, but ruled on the

Since the judgement was for a sum of money

programme and to act on all instructions

properly issued under the terms of the

Proceed with mobilisation and ordering

of materials up to a maximum

strict words of the letter of intent.

Building Contract.

expenditure of 100,000'.

The judgement in Fraser Williams [Southern)

Ltd -v- Prudential Holborn Ltd (1994) 64 BLR
1 gives full details on the use of the phrase

It was held that:

The Plaintiff had an option of whether to

In the event they spent much more and were

held to be entitled to be paid on a quantum

subject to contract, where it was held,

start or not but, having started, the

meruit basis. In this case they had provided

allowing the appellants appeal:

Plaintiff was under an obligation to

continue with the works and not to stop,

a service well in excess of that described in

(1) In order to determine whether a

the letter of intent. It is possible that if a letter

contract had been concluded, it was

unless the Defendant appointed another

of intent is, for say drawing work, and limits

necessary to examine the course of

contractor or gave notice abandoning

the sum to be spent and only drawing work

dealing between the parties, bearing in

the work, etc. envisaged by the letter.

is in fact done then the expenditure cap may

mind that the phrase subject to contract

hold. If the reason for the expenditure cap

was normally used to prevent a party

Although this was not an issue in the

is given then it is suggested its effectiveness

from being contractually bound.

judgement it appears that one of the factors

is enhanced, under the second limb of

However, when used by experienced

which made this letter of intent binding upon

commencing work was that it was for the

Hadley -v- Baxendale and the cop should

businessmen, subject to contract is

hold, at least until further work is done. The

expenditure cap will probably be defeated if

normally taken as meaning that

whole of the envisaged work and

subsequent instructions. This is compatible
with the judgement in Monk.

acceptance must be in writing. On that

the supplier makes it clear that the capped

basis, the proposal was not an offer

sum has been expended and further work

capable of being accepted.

continues with the full knowledge of the

WHEN ACCEPTANCE OF A LETTER

OF INTENT DOES NOT CREATE A
CONTRACTUAL OBLIGATION
It has been seen that, in general, it is
absence of disagreement that enables a
letter of intent if acted upon to be treated as
a binding contract. In the absence of any
further qualification, the resolution of
outstanding matters will conclude the
contract. This was shown in VHE -vMcAlpine.
While in many situations the parties will be
so close to agreement that the creation of a

purchaser.

(2) The letter of 10 March amounted to

no more than on acceptance that the

An alternative method to restrict the

parties should go a stage further. The

obligations of the parties resulting from the

parties behaviour indicated that they

acceptance of a letter of intent is to state that

both expected a formal contract to be

agreed.

it is not to create legal and/or contractual

relations. This is likely to be a more certain
method as the judgement in Comyn Ching -v-

(3) The reason for the letter of 5 April

Radius Plc (1997) CILL 1243 suggests:

was that both parties considered that it

Very often, what is called a letter of

intent is properly construed as a binding

was time to put into place the contract to

which the proposal of 3 March was

agreement, or as an offer capable of

subject, but, since there was no

acceptance. However, I do not so

acceptance, there was no concluded

agreement.

construe the letter of 25 November

1998.

When a purchaser under a letter of intent is

claiming that the acceptance of the letter of

whether the contract was binding:

(1) there must have been an intention

It was held that Mifflin were in breach of

by both parties continuing up to April

contract in not having concluded a sub-

demonstrated that he did not implement the

1960, to make a contract;

contract with Budge and could therefore not

(2j

recover their money as a consequence. It

was held:

procedures of that form of contract then it is

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then sought their money from the employer.

intent constituted a contract under the terms

of a certain standard form and it is

likely that the supposed contract will be

found not to exist. In Alldridge (Builders) Ltd

been ad idem on all the terms which they

The fact remains that the forms were

-v- Grantactual (1995) CILL 1225 it was

then regarded as being required in order

never completed and that the condition

that a contract should come into

of a sub-contract in form NAM/T Section

found:
Mr Eastwick himself agreed in cross-

at that date the parties must have

existence;

examination that the parties did not in

III, which was to discharge the contract

based on the letter of intent, was

fact administer the contract in

(3)

accordonce with the provisions of IFC

ad idem must not omit any term which,

the terms on which the parties were

therefore never fulfilled.

84. He agreed that an FC 84 letter of

even though the parties did not realise it,

However, although there was a failure of

notice was nowhere to be found, and

was in fact essential to be agreed in

that the contract was never fully

the condition which was to discharge the

contract based on the letter of intent, that

operated to the letter of the law which is

order to make the contract commercially

; and

set out in IFC 84. In paragraph 52 of

his witness statement, Mr Davis identified

(4) there must be some manifestation

found, a breach by the plaintiffs of their

obligation under that contract to

numerous provisions in the amended

which indicated with sufficient clarity

conclude a sub-contract with Budge by

from of IFC 84 which the defendant

asserts was intended to apply and which

acceptance by the offeree of the offer as

completing Section III of NAM/J.

then made, such acceptance complying

Mr Davis says were not operated. This

with any stipulation in the offer itself as

Clearly, the damages for that breach are

the sums for which the defendants are

evidence is not challenged.

to the manner of acceptance.

liable to the plaintiffs under the letter of

failure was itself, on the facts I have

intent
In my judgement, therefore, the

He only found 1, 2 & 4 to be satisfied.

defendants fall back position cannot be

Proposition 3 was satisfied if the terms of the

Where o letter of intent is phrased so as to

sustained either, and the terms of IFC 84

contract could act retrospectively.

He accordingly held that a contract

be a clear intention not to formulate a

came into existence between the parties

on 11 April 1960, for the carrying out

not be destroyed by subsequent actions,

other than the formation of such a contract.

by the plaintiffs of the civil engineering

The payment of money, for example, even if

were not incorporated info the contract

between the parties.

binding contract, then that clear intent will

THE INCORPORATION OF EARLY

INSTRUCTIONS

work for the power station, substantially

prior to any performance by the supplier,

on the terms set out by the defendants in

will not change an informal arrangement

their points of defence, and that the

into a binding contract.

Unless otherwise agreed, instructions and

contract had retrospective effect to

variations given before the contract is

govern the relationship of the parties

In Comyn Ching -v- Radius Plc {1997) CILL

concluded and which would be allowable

from the inception of the work.

1243 it was held:

under the contract once concluded, will

It is said that when Mr Dixon on behalf

become instructions or variations under the

contract.

of the defendants accepted a cheque for

SPECIAL CASES

15,000 from Mr Culverhouse together

with the letter of intent, he thereby

Hannen and Cubitts Ltd -v- Atomic Power

The general rule is that a letter of intent

places on the purchaser the obligation to

entered into a contract on the terms of

the letter of intent. I do not accept that.

Constructions Ltd 3AII ER 1962 1035 Mr

Justice Megaw had to decide whether the

pay the supplier for any work or service

done in response to the issue of a letter of

By accepting a cheque for 15,000, the

defendants plainly entered into a

works done by the plaintiff between the

intent. This may not be true where the letter

contract to do certain work ordered by

receipt of a letter of intent in January 1959

and the signing of a contract in April 1960

of intent states that a specific course of

SWEL, and they also followed normal

commercial practice to get some money

In Trollope & Colls Ltd and Holland &

were done under the terms of that

action is to be taken, such as the entering

into a subcontract with a third party.

agreement. The plaintiff sought payment for

that work on a quantum meruit basis. Mr

In Mifflin Construction Ltd -v- Netto Food

up front for the work they were carrying

out. But I hold that they did not enter
into any further legal obligation.

Justice Megaw saw no difficulty in the effect

Stores Ltd 1993 ORB 66 the specialist

of a contract being retrospective:

contractor Mifflin had been issued a letter of

One of the most commonly quoted cases, in

So far as I am aware, there is no

intent for structural steelwork. In this case

connection with letters of intent is Turriff

principle of English law which provides

the intention was that Mifflin would

Construction Ltd -v- Regalia Knitting Mills Ltd

that a contract cannot in any

eventually become a sub-contractor of the

circumstances have retrospective effect,

main contractor yet to be appointed.

9 BLR 20. That this should be so is

surprising since in this case the letter of

Budge were appointed as main contractors

intent does not conform to the description of

Lord Justice Neil in Monk -v- Norwich Union

or that, if it purports to have, in fact,

retrospective effect, it is in law a nullity.
The reason the plaintiff challenged the

and the necessary instructions were issued

by the contract administrator, on behalf of

validity of the contract signed in April was

the effect of the large number of variations

the employer. Despite meeting with Budge

and agreeing outstanding matters, such as

that had been carried out between the letter

of intent and the contracts execution. These

the programme of the works, Mifflin never

performance in return, usually

concluded a sub-contract with Budge.

remuneration for his performance.

of on if contract being where:

A requests B to carry out a certain
performance and promises B that, if he
does so, he will receive a certain

variations were not incorporated into the

contract, which reflected the original design

In settlement of their account Budge sent

Turriff -v- Regalia can be regarded as a

intent. Mr Justice Megaw stated that four

Mifflin a cheque which was dishonoured

special case in that the supplier requested

propositions needed to be considered as to

and Budge went into liquidation. Mifflin

the letter of intent in the following words,

Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.

which were recorded in minutes of a

SUMMARY

meeting with Regalia:

'TTS requested on early letter of intent

(1) Letters of intent do not normally create a

from the client to cover Turriff Ltd for the

contractual obligation, but are more often an

intensive design work now commencing

offer open for acceptance.

and for the essential orders on subcontractors necessary to meet a 38 week

(2) Accepting the letter of intent may not

phase one programme commencing

effect a contract on the terms of a tender as

early August The client confirmed that

submitted for the work and subsequent

his letter of intent would be forwarded to

negotiations.

us as soon as possible.
(3) Often the letter of intent will identify
Effectively this was an offer to do work for

matters to be agreed, or declare it to subject

payment which would be regarded as

accepted on receipt of a letter of intent.

to contract. Such a letter of intent if acted

Such a letter of intent was provided in the

once all outstanding matters are agreed or a

formal contract executed, the effects of

following words:
Dear Sirs, As agreed at our meeting of

upon will only become a binding contract

which will normally be retrospective.

2 June I969 it is the intention of Regalia

to award a contract to Turriff to build a

(4) A letter of intent may limit the work to be

factory including production, stores,

done. Where further work is performed at

offices and canteen facilities to be built in

the behest of the purchaser and no formal

four continuous phases.

contract comes into being, the supplier is to

Phase I to be on a fixed price basis as

on a quantum meruit basis.

perform in a reasonable time and be paid

agreed and phases II, III and IV to be
calculated on the same basis as Phase I
and completed by 1972. The
commencing date to be 1 August and the

CONCLUSIONS

terms of payment to be negotiated on a

What are the effects of a letter of intent? In

monthly form against bills of quantity

supplied by Regalias surveyor.

the purchaser will if negotiations are not

return for any early commencement of work

concluded, lose much of the strength of his

All this to be subject to obtaining

negotiating position, a situation which will

agreement on the land, and leases with

worsen with time.

the Corby Development Corporation, full

building and bye-law consent, and the

If no contract is concluded the suppliers

site investigation being undertaken by

position at law at any rate is very strong.

Drilling and Prospecting International Ltd.

He has to perform only in a reasonable time

and is entitled to a quantum meruit, often

The whole to be subject to agreement on

considered to be cost plus profit or better.

an acceptable contract.

As Lord Justice Neill quoting from Goff J

says:

pay for work done in advance Mr Justice

It would be an extraordinary result if, by

acting on the buyers request in such

Fay found:

circumstances, the seller were to assume

Despite Regalia not expressly undertaking to

The defendants made known to the

plaintiffs that they required an indemnity

an unlimited liability for continual

performance, when he would never

in respect of work done between them

assume such liability under any contract

and the execution of the contract. I am

which he entered into.

satisfied that he understood that they

wanted an assurance that they would be

It must be questioned as to how many

paid even though the contracts were not

purchasers, keen for their projects to get

executed.

under way, rush into a letter of intent

appointment, nor realising that in doing so

The letter of intent was given.

they may be throwing away all the thought

and care they believed they had

The letter of intent was accepted as

satisfying the request.
and the Judge held:
They (the plaintiffs) indicated that they

incorporated into their contractual

arrangements?
Finally, paraphrasing a comment in S N
Balls article in The law Quarterly Review,

would regard receipt of a letter of intent

where letters of intent are concerned the

as an acceptance of their offer. On 17

concept of caveat emptor is very much alive

June the letter of intent was sent. Unless

the terms of that letter negated

and kicking.

acceptance of the offer, upon its receipt

the offer was accepted and the ancillary
contracts came into existence.

ORB
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