Letter of Intent vs Contract
Last updated: February 2025
Quick Comparison
| Aspect | Letter of Intent (LOI) | Contract |
|---|---|---|
| Legal status | May or may not be binding depending on wording | Fully legally binding |
| Scope | Usually covers limited preliminary matters | Covers the full scope of the arrangement |
| Purpose | Bridge between agreement in principle and formal contract | The definitive legal document governing the relationship |
| Risk | Parties exposed if deal collapses before contract | Full contractual protections apply |
What Is a Letter of Intent (LOI)?
A document expressing a party's intention to enter into a contract, often used to enable preliminary work to begin while the formal agreement is being finalised.
Key Features
- • Expresses intention to contract but may not be fully binding
- • Often authorises limited work to begin before the contract is signed
- • May include a cap on costs recoverable if the deal falls through
- • Common in construction, procurement, and M&A
Best For
- • Enabling urgent work to start while contracts are negotiated
- • Confirming commitment before due diligence is complete
- • Providing comfort to a preferred bidder in a tender process
What Is a Contract?
A legally binding agreement that creates enforceable obligations between the parties.
Key Features
- • Contains all essential terms with certainty
- • Both parties intend to be legally bound
- • Enforceable through the courts
- • Provides comprehensive protection for both sides
Best For
- • Any arrangement where legally binding obligations are needed
- • Situations requiring full clarity on all terms
- • Relationships with significant financial or commercial risk
When to Use a Letter of Intent (LOI)
Use an LOI when there is urgency to start work but the formal contract is not yet ready. Common in construction projects where mobilisation cannot wait for contract negotiations to conclude.
When to Use a Contract
Use a contract whenever possible. The LOI should be a temporary measure, not a substitute for a properly negotiated agreement.
Which Does Your Business Need?
Always aim for a full contract. An LOI is a practical tool for urgent situations but carries risk. If you must use one, clearly define the scope of authorised work, the cost cap, termination provisions, and whether the LOI is binding.
FAQ
Can a letter of intent create a binding contract?
Yes. Under English law, if an LOI contains all essential terms and demonstrates intention to be bound, it may be held to be a binding contract regardless of its label. Courts look at substance over form. RTS Flexible Systems v Molkerei Alois Muller (2010) is a key Supreme Court case on this point.
What should I include in a letter of intent to manage risk?
Include a clear scope of authorised work, a cost cap, a termination mechanism, a longstop date by which the formal contract must be signed, and an express statement of which terms are intended to be binding.
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Get Started FreeThis is guidance for UK businesses, not legal advice. Consult a solicitor for complex matters.
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