Types of letters of intent

Instructions to proceed with consent to spend are sometimes referred to as 'if' contracts, and usually take the following form:

'if you commence works pending preparation of the contract documents, then we will reimburse you your reasonable costs should the contract not be entered into.'

These agreements are legally binding contracts which pre-date and are superseded by the principal contract when it is executed. They must be entered into by a duly authorised representative of the party procuring the works. Consultants often make the mistake of issuing such letters on behalf of their clients. Unless the practitioner has authority to enter into contracts as the agent of their client, they should not sign such letters, but should leave it to the client to do so.

A sample 'consent to spend' letter is included in the related forms section.

Letters of consent to spend are very flexible and usually operate on a 'cost plus' basis, failing execution of the main contract. They may or may not provide for interim payments before execution of the principal contract.

If a letter of consent to spend is in place, the party procuring the works will usually be able to revoke the contract without incurring a liability for loss of profit on outstanding works.

When drafting letters of consent to send, it is necessary to address the following:

• the parties;
• the project and the works;
• the price (if agreed);
• the intention to enter into a formal contract;
• the dates for possession and completion;
• what the other party will be entitled to if the contract is revoked by either party (for example, will profit be allowed?);
• whether the contractor will be entitled to interim payments before the principal contract is executed, and if so, how much and how often;
• insurance of the works;
• third-party liability insurance;
• whether liability is limited by a financial ceiling, and if so, at what level, and how this can be revised;
• the procedure for terminating the letter of consent to spend, including provisions requiring the supplier to facilitate an efficient handover to an alternative supplier, in addition to provisions preventing the supplier from terminating without good reason and liabilities in the event of such termination. This prevents the supplier from securing a disproportionately strong negotiating position by threatening to cease works; 
• the expiry of the letter of consent to spend on execution of the main contract;
• the power to issue certificates and instructions;
• the status of those certificates and instructions once the contract has been executed;
• a record of the negotiations as they stand at the date of the letter of intent, together with a schedule of agreed actions for resolving the outstanding matters;
• if negotiations are based on a formal offer (for example, a qualified tender), clarification that that offer remains open and irrevocable until a stated long-stop date or such time as the formal contract is executed, whichever is sooner. This secures another fall-back position in the event that negotiations are not successful;
• confirmation that the contract created by the letter of intent will terminate upon execution of formal contracts;
• confirmation that the formal contract, when executed, will encompass all work done, instructions issued and payments made (if any) under the letter of intent, as if they had been done, issued or made under the terms of the formal contract; and
• questions of dispute resolution and jurisdiction - confirmation of how any disputes arising under the terms of the letter of intent are to be resolved.