Michael Curtis, Crown Office Chambers

LETTERS OF INTENT

1. Letters of intent are not confined to the construction and engineering

industries. However, most of the reported and unreported cases concern those
industries and so for convenience the terms ‘Employer’ and ‘Contractor’ are
used below.

2. In the present context, the term ‘Letter of Intent’ is used to describe a letter
from the Employer to the Contractor which includes the following elements:

a. The Employer indicates an intention to enter into a formal, written

contract with the Contractor for the Contractor to carry out the work
described in the letter of intent.

b. The Employer requests the Contractor to start work at once or at any

rate before the parties execute the formal, written contract.

3. However, the expression is not a term of art. The term can embrace letters
which only include element a. above – but if they do, they are unlikely to have
any legal consequences.

“Letters of intent come in all sorts of forms. Some are merely expressions of
hope; others are firmer but make it clear that no legal consequences ensue;
others presage a contract and may be tantamount to an agreement ‘subject to
contract’’ others are contracts falling short of the full-blown contract that is
contemplated; others are in reality that contract in all but name. There can
therefore be no prior assumptions, such as looking to see if words such as
‘letter of intent’ have or have not been used. The phrase ‘letter of intent’ is
not a term of art. Its meaning and effect depend on the circumstances of the
case”.
Per HHJ Humphrey Lloyd QC ERDC Group Limited v Brunel University
Judgment 29th March 2006 (Case Summaries paras 58 to 65)

4. Pending the execution of the formal, written contract a Letter of Intent

containing the two elements identified above will normally take effect in one
of three ways:

a. As a request by the Employer to the Contractor which, if actioned by

the Contractor, entitles the Contractor to a restitutionary remedy,
namely payment of a reasonable sum (a quantum meruit) for the value
of any work done or any materials supplied.

b. As a request by the Employer to the Contractor, which if actioned by

the Contractor, creates an interim contract between the parties on its
own terms. Those terms govern the rights and obligations of the
parties pending the execution of the formal written contract.
 Michael Curtis, Crown Office Chambers

c. As a final contract between the parties incorporating the terms and

conditions of the formal, written contract notwithstanding the failure of
the parties to execute the formal, written contract.

5. For all practical purposes, where the Letter of Intent results in a contract which
incorporates the conditions of the JCT or other standard form referred to in the
Letter of Intent, it will make little difference whether the Letter of Intent is
analysed as falling into the second or third of these categories. What matters
is whether the conditions are incorporated or not.

6. The categories can therefore be more usefully reclassified as follows:

a. As a request by the Employer to the Contractor which, if actioned by

the Contractor, entitles the Contractor to a restitutionary remedy,
namely payment of a reasonable sum (a quantum meruit) for the value
of any work done or any materials supplied (Category One)

b. A request by the Employer to the Contractor, which, if actioned by the

Contractor, creates an interim contract between the parties on terms
that fall short of the terms and conditions of the relevant standard form.
(Category Two).

c. As request by the Employer to the Contractor, which, if actioned by the

Contractor, creates an interim contract between the parties on most or
all of the terms and conditions of the relevant standard form
OR
As a final contract between the parties incorporating the terms and
conditions of the formal, written contract notwithstanding the failure of
the parties to execute the formal, written contract (Category Three).

7. Put more simply, in any case the issues will be these:

a. First, was there a contract between the parties?

b. Second, if so, what were its terms?

8. Q: Why does it matter if there is an interim contract or a final contract

incorporating all the terms and conditions or merely a restitutionary right to
payment of a reasonable sum?

9. A: When one or both of the parties seeks to rely on an express and/or implied
contract term (whether in the interim contract or the final contract) in order to
obtain a remedy (by claim or defence) under that term or for breach of it. Or
where the contractor thinks that a quantum meruit will reap a better reward
than his contract rates.

10. For example:

a. In British Steel v Cleveland Bridge 24 BLR 94 (Case Summaries paras

1 to 4), Robert Goff J, British Steel claimed the price for goods sold
 Michael Curtis, Crown Office Chambers

and delivered. Cleveland Bridge sought to set-off a counterclaim for

damages on the basis that British Steel delivered the goods late and out
of sequence.

b. In Durabella Ltd v J Jarvis & Sons Ltd (2001) 83 Con LR145 (Case
Summaries paras 16 to 17) Jarvis sought to rely on a ‘pay when paid’
clause in Jarvis’s conditions in defence to a claim by Durabella for
payment for work carried out.

c. In Jarvis Interiors Ltd v Galliard Homes [2000] BLR 33 (Case

Summaries paras 11 to 14) Galliard sought to rely on an arbitration
agreement when applying for a stay of proceedings brought by Jarvis.

d. In Mowlem PLC (trading as Mowlem marine) v Stena Line Ports Ltd

[2004] EWHC 2206 (Case Summaries paras 39 to 44) the employer
relied on an express term in the letter of intent imposing a ceiling on
the amount the employer would be liable to pay.

11. It is therefore important to be able to say which category a Letter of Intent

falls into. In each case the answer will depend on the intention of the parties,
which is found by an objective interpretation of:

a. The language of the Letter of Intent

b. The surrounding circumstances, including anything the parties wrote,

said or did subsequent to the Letter of Intent.

Category One: Cases where there is no contract and where the Contractor has a
restitutionary right for payment of a reasonable sum for the work done and materials
supplied.

12. The court prefers to avoid putting a Letter of Intent into Category One at all.

13. Where a letter of intent authorises work, materials or services to be provided

pending the conclusion of some further agreement and the letter is accepted,
the court will try to establish a contract for that which the letter requires since
that would be consistent with the parties’ presumed expectations. However, a
contract cannot exist unless it is clear that, viewed objectively, the parties were
in fact agreed on all the matters which they considered necessary and which
are necessary to form a contract: Durabella Ltd v J Jarvis & Sons Ltd (2001)
83 Con LR 145 per HHJ Humphrey Lloyd QC at 150 (Case Summaries paras
15 to 17).

14. See also:

a. Trentham (G Percy) Ltd v Archital Luxfer Ltd [1993] L Lloyd’s Rep 25

at page 27 (Case Summaries paras 5-8) where Steyn LJ said in an often
quoted dictum that the fact that a transaction is performed on both
sides will often make it unrealistic to argue that there was no intention
to enter into a contract.
 Michael Curtis, Crown Office Chambers

b. Jarvis Interiors Ltd v Galliard Homes [2000] BLR 33 (CA) (Case

Summaries paras 11 to 14), where Lindsay J (with whom Schiemann
LJ and Evans LJ agreed) noted the “broad disposition to find a
contract if one can”.

15. However, in some cases the terms of the Letter of Intent and/or the facts may
be inconsistent with an intention to enter into any contract at all. Such cases
will fall into Category One. An example is British Steel v Cleveland Bridge
24 BLR 94 (Case Summaries paras 1 to 4).

16. Jarvis Interiors Ltd v Galliard Homes [2000] BLR 33 (Case Summaries paras
11 to 14) is a more recent example. The Court of Appeal found that in the
absence of a contract under seal, there was no contract at all. Note, however,
that Galliard did not advance the argument that the Letter of Intent, when
acted on, created a contract – Evans LJ clearly thought this argument would
have succeeded.

17. Where the case falls into Category One, the effect of the Letter of Intent is to
authorise the Contractor to carry out the work. However, the Contractor will
be entitled to stop work at any time without notice. Similarly, the Employer
will be entitled to instruct the Contractor to stop work at any time without
notice. Similarly, in the absence of a contract, the Employer will not be able
to counterclaim for breach of contract e.g. for the cost of defective work.
However, it seems that the defects can be taken into account when assessing
what the work is worth. See British Steel v Cleveland Bridge 24 BLR 94
(Case Summaries paras 1-4).

Category Two: Interim Contracts whose terms fall short of the terms of the intended
Final Contract

18. The contract can take one of two forms. Either there may be an executory
contract under which the parties undertake reciprocal obligations. Or there
may be an “if” contract under which A requests B to provide work or materials
and promises to pay B if he does so: British Steel v Cleveland Bridge 24 BLR
94 at 201-121, Robert Goff J (Case Summaries paras 1 to 4).

19. Where there is an “if” contract, the Contractor will usually be under no
obligation to perform any work and, where he does, he will entitled to stop
work at any time: see British Steel per Robert Goff J at page 122 (Case
Summaries paras 1 to 4) and per HHJ Thornton QC Hall & Towse South v
Ivory Gate 62 Con LR 118 at para [2] (Case Summaries paras 9 to 10)..

20. In Mowlem PLC (trading as Mowlem marine) v Stena Line Ports Ltd [2004]
EWHC 2206 (Case Summaries paras 39 to 44) it was common ground that
each Letter of Intent in a series created an interim contract which superseded
each earlier contract. Each Letter of Intent imposed a ‘cap’ on the amount
which the Employer would be liable to pay. The Employer argued that this
was simply an ‘if’ contract with the result that the Contractor was entitled to
stop work at any time. The issue was whether the Contractor was entitled to
 Michael Curtis, Crown Office Chambers

be paid a reasonable sum in excess of the ‘cap’ for work he carried out which,
he said, exceeded the value of the ‘cap’. HHJ Richard Seymour QC held that
all the work was subject to the final interim contract and so the ‘cap’ applied
to it.

21. The initial contract in Westminster Building Co Ltd v Beckingham [2004]

EWHC 138 (TCC) (Case Summaries paras 32 to 38) was an “if” contract.

22. Hall v Towse South Ltd v Ivory Gate Ltd (1997) 62 Con LR 117 (Case
Summaries paras 9 and 10) and ERDC Group Ltd v Brunel University (TCC)
(Case Summaries paras 58 to 65), HHJ Humphrey Lloyd QC, 29th March 2006
are further examples of cases where the court found a bilateral contract whose
terms fell short of the intended bilateral contract.

Category Three: Interim Contract incorporating the standard terms or a Final Contract

23. In Category Three cases, the proper conclusion is that the parties intended to
contract on the full terms of the ‘intended contract’ referred to in the Letter of
Intent notwithstanding that they never in fact executed a formal written
contract. Depending on the facts, in particular on the precise language of the
Letter of Intent, this may result either in a conclusion that the parties entered
into an Interim Contract pending execution of the formal contract or that there
was a Final Contract because the parties expressly or impliedly dispensed with
the requirement for the execution of a formal contract.

24. Durabella Ltd v Jarvis & Sons Ltd (2001) 83 Con LR 145 (Case Summaries
paras 15 to 17) is a recent example.

25. Another is Harvey Shopfitters Limited v ADI Limited [2003] EWCA Civ 1757,
judgment 13 November 2003 (Case Summaries paras 27 to 31). The crucial
phrase in the Letter of Intent was “If, for any unforeseen reason, the contract
should fail to proceed and be formalised, then any reasonable expenditure
incurred by you in connection with the above will be reimbursed on a quantum
meruit basis”. Harvey argued that this meant the parties intended the contract
should be “formalised” by formal contract documents being signed, absent
which Harvey was entitled to a quantum meruit. The Court of Appeal rejected
this argument. The Court of Appeal found that the words meant that the only
circumstance in which Harvey would be entitled to a quantum meruit was if
the contract did not proceed and was not finalised. The contract did proceed
and so Harvey was not entitled to a quantum meruit.

26. By parity of reasoning, HHJ Thornton QC reached a similar conclusion in

Westminster Building Co Ltd v Beckingham [2004] EWHC 138 (TCC),
judgment 20 February 2004 (Case Summaries paras 32 to 38).

27. Allen Wilson Shopfitters v Buckingham [2005] EWHC 1165 (TCC) (Case
Summaries paras 45 to 48) is another case where HHJ Coulson QC reached
the same conclusion. HHJ Coulson concluded that the signing and returning
of the Letter of Intent by the contractor led to a contract incorporating the JCT
conditions referred to in the Letter of Intent.
 Michael Curtis, Crown Office Chambers

Suggested guidelines

28. The more recent cases show that the court is inclined to find a contract if it can
(at least in construction/engineering cases) since the court believes this will
usually accord with the intention of the parties (Hall & Towse v Ivory Gate1;
Durabella v Jarvis2; Jarvis v Galliard3).

29. However, when the Letter of Intent and the surrounding circumstances show
that the parties were continuing to negotiate about matters that were or that
they regarded as essential to the existence of a contractual relationship
between them, there will be no contract (Durabella v Jarvis; British Steel v
Cleveland Bridge4). The same will be true if the Letter of Intent expressly
states that there will be no contract between the parties until the occurrence of
a stated event and that event does not occur or if the Letter of Intent contains
some other express term negativing the existence of a contract (dictum of
Steyn LJ in Trentham v Archital; Jarvis v Galliard5).

30. Where the Letter of Intent requests the Contractor to carry out work or to
supply materials, then in the absence of a contract:

a. the Contractor is
i. entitled to stop work at any time (British Steel v Cleveland
Bridge); and
ii. is entitled to a quantum meruit for the work carried out (British
Steel v Cleveland Bridge) subject to any ‘cap’ imposed by the
Letter of Intent.

b. The Employer:
i. Is entitled to stop the work at any time (British Steel v
Cleveland Bridge)..
ii. Will not be able to bring a counterclaim for damages for inter
alia defective work (British Steel v Cleveland Bridge).
However, the value of putting right the defects is likely to be
taken into account when assessing what the work is worth
(ERDC Group v Brunel University6).

31. Where the Letter of Intent requests the Contractor to carry out work or to
supply materials and the language of the Letter of Intent and/or the
surrounding circumstances indicate that the parties intend to contract but not
to assume bilateral obligations, a unilateral Interim Contract will usually result
(Mowlem v Stena7; Westminster v Beckingham8). If so:

1
Case Summaries paras 9 and 10.
2
Case Summaries paras 15 to 17.
3
Case Summaries paras 11 to 14.
4
Case Summaries paras 1 to 4.
5
Case Summaries paras 5 to 8.
6
Case Summaries paras 58 to 65.
7
Case Summaries paras 39 to 44.
8
Case Summaries paras 32 to 38.
 Michael Curtis, Crown Office Chambers

a. The Contractor is authorised but not obliged to carry out the work and
he is not required to complete the work. The Employer can terminate
the work at any time.

b. Because there is a contract, there is room for the implication of terms

concerning the quality of the work etc, so affording the Employer a
potential counterclaim.

32. The court is well aware that in the construction industry the parties all too
often simply fail to get round to executing a formal contract incorporating the
terms of a standard form the parties contemplated should govern their
relations.

33. Accordingly, where the Letter of Intent indicates an intention to enter into a
contract on a standard form, where the contractor starts work on the basis of
the letter and where all that is outstanding is the execution of the written form:

a. the court is likely to conclude:

i. The parties entered into a bilateral contract (final or perhaps
interim).
ii. The contract incorporated the terms of the standard form
(Harvey Shopfitters v ADI9; Westminster Building v
Beckingham10; Allen Wilson v Buckingham)..

b. The following factors are, without more, unlikely to lead to the

opposite conclusion:
i. The absence of an executed contract (Hackwood v Areen11;
Westminster Building v Beckingham; Harvey Shopfitters v ADI;
Allen Wilson v Buckingham12).
ii. The use of the future tense in the letter of intent (Hackwood v
Areen).
iii. The fact that the parties continue to negotiate about those terms
of the final contract (Hackwood v Areen) that the court regards
as immaterial.
iv. The absence of agreement on points the court regards as
immaterial.

34. Where the Letter of Intent indicates an intention to enter into a contract on a
standard form, where the contractor starts work on the basis of the letter and
where the parties do not execute the written form, one or more of the
following factors may lead to the conclusion that the parties entered into either
an interim bilateral contract, but one which did not incorporate the terms of the
relevant standard form, or a simple interim unilateral contract:

9
Case Summaries paras 27 to 31.
10
Case Summaries paras 32 to 38.
11
Case Summaries paras 53 to 57.
12
Case Summaries paras 45 to 48.
 Michael Curtis, Crown Office Chambers

a. An absence of agreement on all the matters which the parties

considered necessary and which were necessary to form a final
contract: Durabella v Jarvis13. Such a failure may result in the
conclusion that there wasn’t a contract at all.

b. The fact that the parties continue actively to negotiate about material
matters such as the scope of the work and materials to be supplied, the
date for completion, the price etc. In some circumstances, such
negotiations may also indicate the absence of any intention to contract
at all, as in British Steel v Cleveland Bridge14.

c. Language in the Letter of Intent which is inconsistent with the

incorporation of the terms of the standard form or which makes it clear
that pending something further happening, there is a simple unilateral
right to be paid for work done. For example, an express provision that
pending the execution of the formal contract, the Contractor is to be
paid a reasonable sum for the work executed and the Employer is
entitled to terminate the Work at any stage. In some circumstances,
however, such a provision may prevent a contract arising. Or language
that makes it clear the Contractor is instructed to commence only a
limited amount of work (Eugena v Gelande15).

35. Where the proper conclusion is that there is a bilateral Interim Contract, but
one which does not incorporate all the terms of the standard form referred to in
the Letter of Intent, it seems the court is likely to be ready to conclude that any
relevant terms were incorporated subject to evidence of a contrary intention:
(Hall & Towse v Ivory Gate16; Hackwood v Areen17).

36. Where the Letter of Intent results in an Interim Contract or Contracts for only
part of the Works:

a. The Contractor will be entitled to payment at the agreed rates for that
part of the Works.

b. Where the Contractor carries out additional work, the question of what
further payment, if any, he will be entitled to will depend on the
circumstances.
i. Where a Contractor carries out the additional work at the
Employer’s request, the normal inference is that the parties
intend the Employer shall pay the Contractor a reasonable sum
for it (Latchlin v General Med18).
ii. Where, however, the Letter of Intent places a ‘cap’ on the
amount of the Employer’s liability, the Contractor will not be
entitled to further payment above the ‘cap’, subject to the

13
Case Summaries paras 15 to 17.
14
Case Summaries paras 1 to 4.
15
Case Summaries paras 49 to 52.
16
Case Summaries paras 9 to 10.
17
Case Summaries paras 53 to 57.
18
Case Summaries para 69.
 Michael Curtis, Crown Office Chambers

Employer being barred from relying on the ‘cap’ by waiver,

estoppel etc (Mowlem v Stena19; Eugena v Gelande20).
iii. However, when the letter is properly construed it, the ‘cap’ may
be ineffective (AC Controls v BBC21).

c. The other rights and obligations of the parties will depend on the terms
of the Interim Contract (Eugena v Gelande).

Illustrative Draft letters

Draft letter – quantum meruit.

To Cameron ,Campbell & Blair Builders Ltd

We are pleased to advise you that it is the intention of UK Plc to enter into a
contract with you to build the New Jerusalem. The price will be as quoted in
your tender dated May 2006. The contract will be on the ABC 1980 Standard
Form and will be executed as a deed.

UK Plc is not in a position to award the contract until it has obtained

planning permission.

In the meantime, and on the terms this Letter of Intent, UK Plc authorises you
to carry out the design, planning and procurement work set out in your tender
at […..].

UK Plc is under no obligation to enter into a contract with you. UK Plc shall
be entitled to withdraw the authority granted by this letter forthwith by notice
to you at any time.

UK Plc will reimburse you for all reasonable and proper costs incurred by
you in respect of any work carried out by you under this Letter of Intent but
the terms of this Letter of Intent and your actions in response to it shall not
give rise to a contact of any sort between us.

In the event that UK Plc enters into a contract with you, any work carried out
by you pursuant to this letter shall be treated as though it were carried out
pursuant to the contract. In particular, UK Plc shall pay you for any work
carried out by you pursuant to this letter in a sum calculated in accordance
with the contract, giving credit for any reasonable costs paid under the
previous paragraph.

Please sign and return this letter to us.

19
Case Summaries paras 39 to 44.
20
Case Summaries paras 49 to 52.
21
Case Summaries paras 18 to 21.
 Michael Curtis, Crown Office Chambers

Draft letter – interim contract

To Cameron, Campbell & Blair Builders Ltd

We are pleased to advise you that it is the intention of UK Plc to enter into a
contract with you to build the New Jerusalem. The price will be as quoted in
your tender dated May 2006. The contract will be on the ABC 1980 Standard
Form and will be executed as a deed..

UK Plc is not in a position to award the contract until it has obtained

planning permission.

In the meantime, and on the terms this Letter of Intent, UK Plc instructs you to
carry out the following work set out in your tender [LIST] for the price of £x.

UK Plc is under no obligation to enter into a contract with you to build the
New Jerusalem

UK Plc shall be entitled to determine your employment under this letter upon
reasonable notice to you at any time.

Save in so far as they are inconsistent with the terms of this Letter, the terms
of your tender including the conditions of the ABC 1980 Standard Form
regarding the quality and timing of your performance and regarding your
entitlement to payment shall cover the work performed by you under this
Letter until UK Plc enters into a formal contract with you.

In the event that UK Plc enters into a contract with you, any work carried out
by you pursuant to this letter shall be treated as though it were carried out
pursuant to the contract.

Please sign and return this letter to us.

Draft letter – Final Contract

To Cameron, Campbell & Blair Builders Ltd

We are pleased to advise you that it is the intention of UK Plc to enter into a
contract with you to build the New Jerusalem in accordance with your tender
dated May 2006 on the ABC 1980 Standard Form subject to the amendments
noted in the tender documents..

Pending the preparation and execution of the formal contract documents, we

instruct you to commence on site on 1 June 2006.

Michael Curtis,
Crown Office Chambers.