Letters of Intent: The Five Golden Rules

Wednesday, June 8th, 2016



There are 5 golden rules for Letters of Intent (LOI)!

  1. Only permit their use in exceptional circumstances
  2. Prescribe who has the authority and accountability to issue them
  3. Set a financial limit that must not be exceeded by the contractor
  4. Define what has been agreed (and not agreed) at the time of issuing the LOI
  5. Put in writing when it is anticipated the parties will be ready to enter into a contract

We are often asked, ‘Does an LOI create a legally binding contract?’ The answer is YES, if it is written in a specific manner. A pertinent question is, “If we are ready to issue an LOI why not issue an Instruction to Proceed?”

One legal spat over an LOI was Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC). The subject of the litigation was a very large warehouse and wine bottling plant near Bristol, purpose built for Accolade Wines, who contended that the floor of the warehouse was unfit for its purpose.

On 5 October 2007 VFL issued an LOI to Twintec, authorising it to proceed with the work, with a view to the parties entering into a formal sub-contract thereafter (please note the case came to the Construction Court in 2014!).

The terms of the LOI are set out at Paragraph 22 of the judgment. Two facets are worthy of a studied review:

  • It is our intention to award you the Warehouse Slab works for all services as detailed within the documents listed below and attached, for the above project, but we are not yet in a position to enter into this Sub-contract.
  • For the purposes of this letter only, FCL will reimburse you proven reasonable costs for such works satisfactorily completed up to the maximum sum of £2,630,564.59 as detailed within the above documents, excluding VAT In the event that we are unable to conclude the appointment you shall be reimbursed for proven reasonable costs only, in line with the provisions of this letter.

The judge reached the clear conclusion that the LOI was a simple free-standing contract that would govern the parties’ legal relations until a formal sub-contract was entered into.