A Letter of Intent can take many forms but all attempt to express an intention to enter into a contract and a request for work to commence before the contract is concluded. It may be the letter states there is an intention to enter into a contract but without obligation or liability at the time of issue. Therefore anything done on the strength of such wording by a contractor may well be at its risk or the letter may perhaps require some work to be commenced (perhaps to meet a tight programme) e.g. design, placing orders, mobilisation etc. This type of letter can create obligations in that the contractor may recover monies for work carried out even of the contract is not finalised or even if the works do not proceed.
Care must therefore be exercised in the use of letters of intent – it is always far better to finalise the contract details including the governing terms and conditions if at all possible. Frequently such letters are poorly drafted and ambiguous resulting in the parties being uncertain whether or not there is a binding contract. On the other hand it may be that a binding contract has been created when that was not the intention at the time of issue.
Of course in the real world sometimes the overriding necessity is to ‘get the job started’ but even where the use of a letter of intent is unavoidable strenuous efforts should be made to complete the contractual niceties as soon as possible after a start on site. One important reason for this is to ensure both parties know the terms on which they working together. As a Judge said recently in a case:
“It is part of the folklore of the construction industry that there exists a mythical beast ‘the letter of intent’, the effect of which is that it entitles a contractor to payment but does not expose him to any risk, because it imposes no contractual obligations on him.”
Such ‘beasts’ are rare. The case in question involved the construction of a supermarket where the employer (the supermarket) surprisingly did not send out the contract documents which included the supermarket’s own terms and conditions – despite being requested to by the design and build contractor. For this reason the Judge had no difficulty deciding that the supermarket terms and conditions did not apply.
However on the facts of the case he did find that a simple contract had been concluded between the parties and that it imposed obligations on both parties. This was not the outcome either parry sought but the result was that the contractor did have various contractual obligations to the supermarket, most notably those implied in respect of workmanship.
The following is a judicial direction or suggestion as to when it may be proper to use a letter of intent.
(i) the scope of work and the price are either agreed or there is a clear mechanism in place for such work and price to be agreed;
(ii) the contract terms are (or are likely to be) agreed;
(iii) the start and the finish dates and the contract programme are generally agreed;
(iv) there are good reasons to start work in advance of the contract documents.
Finally be warned that where work starts on the basis of a letter of intent the parties can ‘drift’ unknowingly into a concluded contract by the very fact that all the elements for the existence of a contract are finalised.
If in doubt contact us for advice.