Types of letters of intent

There are 3 types of agreement commonly referred to as letters of intent. They are:

• comfort letters;
• instructions to proceed with consent to spend; and
• the recognition of the existence of binding contracts.

Reference to ‘letters of intent’ is used as a generic phrase including all of the these types of document.

Comfort letters are the form of letter of intent with which practitioners in other industries will probably be most familiar. A comfort letter expresses the intention of one of the parties to act in a particular way (for example, to enter into a contract), but does not create any legal obligation on that party actually to act in that way. The author of the letter will only be liable for deviating from the stated intended course of action if the expressed intention was not actually held at the time that the letter was signed.

A sample form of comfort letter is included in the related forms section.

The problems associated with these letters are widely known and it is unlikely that any major contractor would commence work on such a basis. Comfort letters do not create a legally enforceable contract. So long as the intention stated in such a letter is honestly held, no liability arises if the signatory changes their mind and decides not to enter into a contract (see British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984]). However, if there is an understanding that the contractor will be paid for their work, then the contractor will usually be entitled to recompense on a quantum meruit basis. Overall, contractors who commence work on the basis of such statements are exposing themselves to a high level of risk.

Comfort letters are not binding. The only requirement on the party providing the comfort letter is to act in good faith. If the party providing the comfort letter states an intention that is not genuinely held, then they may expose themself to liability for deceit. However, if that party should change their mind after issuing a statement of intent, this may be embarrassing for them, but is unlikely to impose any contractual liability other than to pay a reasonable price for the work done, provided that there was a common understanding that the contractor would be paid for such work. Comfort letters are therefore extremely flexible for those procuring work, but of relatively little value to contractors.

When drafting comfort letters, it is important clearly to state that the letter is only a statement of intent and does not create a binding contract. Payment should not form any part of the agreement. The letter should be headed 'Subject to Contract', to make it clear that it does not create a legally enforceable agreement.

These letters are commonly referred to as ‘agreements to agree’. Even if the letter records an agreement that the parties will use reasonable endeavours to conclude the agreement, such terms are likely to be unenforceable. See Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817.