Playing with Fire! – A Brief Guide to Letters of Intent

A Brief Guide to Letters of Intent

Author: Eugene Lenehan

September 2021

Introduction

Using letters of intent to start construction works is akin to playing with fire! In fact, it is rare for a year to pass by without there being at least one court case involving a letter of intent, highlighting the importance of ensuring that formal contracts are fully agreed and executed.

The courts must get puzzled at why construction companies continue to make the same mistakes, with so many parties neglecting to appreciate that there can be disastrous consequences of failing to agree the contract before work commences.

Case law

Whilst there were several key court cases prior to 2000, setting out various principles in respect of letters of intent, there has continued to be many more cases since then. Listed below are some of the cases from 2000 onward, eight of which went as high as the Court of Appeal, and one went all the way to the Supreme Court:

Stent Foundations Ltd v Carrillion Construction (Contracts) Ltd (CA) 13 July 2000
Durabella v J. Jarvis & Sons Limited [2001] EWHC 454 (TCC)
AC Controls Ltd v British Broadcasting Corp [2002] EWHC 3132 (TCC) 89 Con. L.R. 52
Shimizu Europe Limited v LBJ Fabrications Limited [2003] EWHC 1229 (TCC)
Tesco Stores v Costain Construction [2003] EWHC 1487 (TCC)
Harvey Shopfitters v ADI [2003] EWCA Civ 1757
Westminster Building Company v Beckingham [2004] RTCLR 8 (TCC)
Emcor Drake and Scull v Sir Robert McAlpine [2004] EWCA Civ 1733
Bryen & Langley Ltd v Boston [2005] EWCA Civ 973
Cunningham v Collett & Farmer [2006] EWHC 1771; 113 Con. L.R. 142 (TCC)
ERDC Group v Brunel University (2006) EWHC 687 (TCC)
Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732
Bennett (Electrical) Services Limited v Inviron Limited [2007] EWHC 49 (TCC)
Haden Young Limited v Laing O’Rourke Midlands Limited [2008] EWHC 1016 (TCC)
Mowlem Plc (trading as Mowlem Marine v Stena Line Ports Ltd [2004] EWHC 2206 (TCC)
Diamond Build Ltd v Clapham Park Homes Ltd [2008] EWHC 1439 (TCC)
Whittle Movers v Hollywood Express [2009] EWCA Civ 1189
Associated British Ports v Ferryways [2009] EWCA Civ 189
RTS Flexible Systems v Molkerei Alois Muller GmbH & Co. KG [2010] UKSC 14
Ampleforth Abbey Trust v Turner and Townsend Project Management Ltd [2012] EWHC 2137 (TCC)
Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC)
Penten Group Limited v Spartafield Ltd [2016] EWHC 317 (TCC)
Spartafield v Penten Group [2016] EWHC 2295 (TCC)
Structure Consulting v Maroush [2017] EWHC 962 (TCC)
Arcadis Consulting (UK) Limited (formerly Hyder Consulting (UK) Limited) v AMEC (BCS) Limited (formerly CV Buchan Limited) [2018] EWCA Civ 2222
Anchor 2020 Limited v Midas Construction Limited [2019] EWHC 435 (TCC)
OD Developments & Projects Limited v Oak Dry Lining Limited [2020] EWHC 2854 (TCC)

What is a Letter of Intent?

The Dictionary of Law by L.B. Curzon defines ‘letter of intent’ as follows:

“Device whereby X indicates to Y that he (X) is likely to enter into a contract with Y. May amount to a conditional contract”

A letter of intent typically records the intentions of a party who is expecting to enter into a legally binding contract and in the meantime requests the other party to carry out works before that contract is agreed. Depending on how the letter of intent is drafted, it may also be binding as an interim agreement, allowing works to commence on a provisional basis.

In the case of Tesco Stores v Costain Construction [2003] EWHC 1487 (TCC), HHJ Richard Seymour QC said as follows:

“It is part of the folklore of the construction industry that there exists a mythical beast, ‘the Letter of Intent’, the legal effect of which, if it is acted upon, is that it entitles a contractor to payment for what he does, but does not expose him to any risk because it imposes no contractual obligations upon him … in fact the legal effect of a letter of intent depends upon the true construction of the communications between the parties and the effect, if any, of their actions pursuant to those communications”.

So, every letter of intent needs to be considered individually, to understand its obligations and risks.

As a minimum, it will usually contain a statement of an intention of the parties to enter into a formal contract at some time in the future. However, statements of intention are not usually legally binding. Consequently, letters of intent generally also include a request for the contractor / subcontractor to undertake certain specified works or services, along with a commitment to reimburse the contractor all of its costs (up to a specified limit) if a formal contract is not agreed.

There is no standard form of letter of intent, so their format varies widely. In ERDC Group v Brunel University (2006) EWHC 687 (TCC), HHJ  Humphrey Lloyd QC explained:

“Letters of intent come in all sorts of forms. Some are merely expressions of hope; others are firmer but make it clear that no legal consequences ensue; others presage a contract and may be tantamount to an agreement ‘subject to contract’; others are contracts falling short of the full-blown contract that is contemplated; others are in reality that contract in all but name”.

In the case of Diamond Build Ltd v Clapham Homes Ltd [2008] EWHC 1439 (TCC), the courts recognised and confirmed that three types of letters of intent exist:

  1. Pure letters of intent, which do not give rise to contracts at all.
  2. Some that give rise to a simple contract in themselves and are applicable pending the execution of a formal contract.
  3. Those which are a contract so far as they go, but not subject to the entering into of a formal contract.

In determining whether a letter of intent falls into one of the three above categories, the courts consider both the wording of the letter of intent and the apparent intention of the parties.

Why Do Parties Issue Letters of Intent?

It is not denied that letters of intent are very useful tools, but they should be avoided if at all possible. In a perfect world, construction contracts would be finalised and signed before the works commence, and hence there would be no need for letters of intent.

However, construction contracts are often large and complex, and it may therefore take parties a long time to finalise all the details, with a large number of contractual and commercial matters to be agreed. All of which should ideally be done prior to commencing any works. Nevertheless, there are also pressures to commence the works and avoid a delay to the intended completion date. Getting started on site is rarely logistically straightforward, as contractors must organise supply chains, procure materials and mobilise the right plant and equipment to site as soon as possible.

In the case of Ampleforth Abbey Trust v Turner and Townsend Project Management Ltd [2012] EWHC 2137 (TCC), the court acknowledged as follows:

“in view of the perceived importance of achieving early completion and, specifically, early commencement of the works, it was acceptable to advise commencing [the project] under a letter of intent rather than waiting until a formal building contract could be executed.”

Depending upon how they are drafted, letters of intent provide contractors with assurances that a contract will be finalised, plus the protection to commence work prior to final agreement of the contract, thereby avoiding delays to the project. However, whilst letters of intent are a convenient solution to bring the contractor on board as early as possible, they are sometimes subject to dispute.

In Cunningham v Collett & Farmer [2006] EWHC 1771; 113 Con. L.R. 142, the judge said:

“letters of intent are used too often in the construction industry as a way of avoiding, or at least putting off, potentially difficult questions as to the final make-up of the contract and the contract documents. There is no doubt that, sometimes, they are issued in the hope that, once the work is underway, potentially difficult contract issues will somehow resolve themselves. They are plainly not appropriate in such circumstances”.

Before the parties agree to proceed on the basis of a letter of intent, they should pause and consider why a full contract cannot yet be agreed.  If the answer is that there are still difficult issues to be negotiated, then proceeding on a letter of intent is not going to make these issues go away. From an employer’s standpoint it arguably places them in a weaker bargaining position, as the contractor will have commenced works. This might especially be a problem if the contractor is responsible for the design. From a contractor’s standpoint there is always a risk that the employer will decide to appoint an alternative contractor.

When Should Letters of Intent be Used?

In Cunningham v Collett & Farmer [2006] EWHC 1771; 113 Con. L.R. 142, the judge recognised that there are occasions when a letter of intent is the best way of ensuring that the works can start promptly, explaining that letters of intent can be appropriate in circumstances where:

  • the contract work scope and the price are either agreed or there is a clear mechanism in place for such work scope and price to be agreed.
  • the contract terms are (or are very likely to be) agreed.
  • the start and finish dates and the contract programme are broadly agreed.
  • there are good reasons to start work in advance of the finalisation of all the contract documents.

Despite the above, the court also stressed that regardless of the above circumstances, letters of intent will involve additional risk:

“if the parties enter into a letter of intent of this type, there is a clear risk that agreement will not be possible on all the matters necessary to give rise to the full building contract and that, if there is no such agreement, no principal contract will ever be entered into. It seems to me that that is an inevitable risk of any letter of intent which creates respective rights and obligations, no matter how carefully it is drafted.”

The judge continued by commenting on the importance of good drafting in order to minimise risk:

“The point of the careful drafting, however, is to minimise the risk, to both sides, if no contract eventuates. After all if, pursuant to a letter of intent, the contractor carries out a fixed amount of work, or an amount of work limited by a particular sum, but no final contract can be agreed, then the contractor is paid for the work that he has carried out in accordance with the letter, and the employer looks elsewhere for another contractor to carry out the bulk of the work. In such circumstances, there should be no significant loss to either side”.

What Should a Letter of Intent Include?

A well drafted letter of intent should ideally contain as much detail as is known / agreed, which might generally include the following:

  • The parties to the intended contract.
  • Details of the project.
  • A description of the works to be carried out.
    • A clear explanation of the letter’s purpose, including in respect of:
    • The intention to enter into a formal contract.
    • A request for the contractor / subcontractor to proceed with works.
    • An obligation to pay the contractor / subcontractor for all works carried out under the letter of intent and the basis of such payment, including procedure for calculating any interim payments.
    • Whether the liability to pay the contractor / subcontractor is limited to a financial maximum and if so, at what amount.
    • The procedure each party must follow for terminating the letter of intent.
    • The procedure for calculating and issuing final payment should the work not proceed or if a formal contract is not executed between the parties.
    • Clarification that the letter of intent will expire on execution of a formal contract and that all works carried out under the letter of intent are to be incorporated under the formal contract when executed, with any payments made under the letter of intent to form part of the
    • Contract Sum (thus avoiding potential overpayment problems).
    • The matters that need to be resolved for the contract to be entered finalised.
  • The price (if agreed).
  • The drawings and specification documents on which the price is based.
  • A timescale to complete the works, including the date(s) for possession / access and completion, whether or not there is any sectional completion and provisions for non-compliance.
  • The form of contract (e.g., JCT Design and Build 2016 edition, JCT Standard Building Sub-Contract 2016 edition, NEC4 ECC Option C, NEC3 EC Subcontract Option A. Including any non-standard amendments).
  • An adequate payment mechanism and payment terms.
  • Dispute resolution provisions, including the adjudication procedure (Please see our article on “A Brief Guide to UK Construction Adjudication”), the Adjudicator Nominating Body and whether final determination is by arbitration or litigation.
  • Insurance obligations.
  • Intellectual property rights.

If the letter of intent fails to specify a time for completion, then a reasonable time for completion will be implied. What is deemed reasonable will be a question of fact to be established in relation to the circumstances that existed at the time the contract was formed.

If the letter of intent fails to specify standard of workmanship / quality to be applied to the works then, notwithstanding any statutory obligations, the requisite standard will be that the work must be carried out with proper skill and care using materials that are reasonably fit for purpose and of merchantable quality.

Quantum Meruit

In dealing with the topic of letters on intent, it is useful to understand the related matter of quantum meruit. Quantum meruit generally means a reasonable sum of money to be paid for services rendered or work done.

When calculating quantum meruit, the starting point will usually be the actual cost reasonably incurred by the contractor, plus the addition of a reasonable percentage for profit. In some cases, payment might be calculated on the basis of fair and reasonable commercial rates.

Quantum meruit can be categorised as either ‘contractual quantum meruit’ or ‘resitutionary quantum meruit’. Contractual quantum meruit is a claim for reasonable remuneration where a contract is in place, but the contract is silent on price, whereas resitutionary quantum meruit generally arises where there is no agreement between the parties, or where the agreement between the parties has been voided or has been become unenforceable.

Restitutionary quantum meruit will not apply if there is a contract. Consequently, where a letter of intent has been issued, but no agreement has been reached on a contract, a claim for restitutionary quantum meruit might arise (see below the case of British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1982] Com. L.R. 54 [1984] 1 All E.R. 504 24 B.L.R. 94).

What Happens after the Letter of Intent is Issued?

After the letter of intent has been issued, the parties should not rest until the formal contract has been agreed and executed, as working without one leaves both parties at risk. Despite this, research carried out indicates that a high percentage of works commenced under a letter of intent were completed without a formal contract being concluded.

If the letter of intent includes an end date, or financial limit, it will be necessary to either finalise the contract or issue a new (extended) letter of intent.

The employer should be acutely aware that there is no guarantee the contractor will complete the works. Where the letter of intent creates an ‘if’ contract (sometimes referred to as a conditional contract) the contractor has (i) no obligation to complete the work; and (ii) can stop at any time without a claim for breach of contract arising. This was confirmed in the case of Mowlem Plc (trading as Mowlem Marine) v Stena Line Ports Ltd [2004] EWHC 2206 (TCC).

As the works progress the contractor will get a better idea of whether he can achieve the planned programme durations and whether his tender / contract rates are sufficient. This can create a substantial risk for the employer. If the tender / contract rates become unattractive, or if it appears that the contractor is unlikely to complete within the programme period, the contractor might avoid reaching agreement, preferring to be paid on a quantum meruit basis.

Examples of how the Courts have Dealt with Disputes

One of the best-known cases on letters of intent is British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1982] Com. L.R. 54 [1984] 1 All E.R. 504 24 B.L.R. 94. In this case, the supplier was issued with a letter of intent requesting the manufacture of steel nodes “pending the preparation and issue of an official form of sub-contract”. No agreement was reached on liability for late delivery. British Steel delivered all but one of the nodes, the last one being delayed. As a result, Cleveland Bridge refused to pay. The court found that no contract resulted from a letter of intent. Neither was there any agreement on relevant contractual terms. Hence, there was no contract at all and therefore no provision regarding delivery times.

However, British Steel was nevertheless entitled to be paid a reasonable sum for the work done, based on the law of restitution, for unjust enrichment at the expense of another. Where no contract comes into existence, or the contract between the parties is or becomes unenforceable, the obligation to pay for the work done or goods supplied will be governed by the law of restitution, not the law of contact. This meant that British Steel was entitled to be paid on a quantum meruit basis.

In Stent Foundations Ltd v Carrillion Construction (Contracts) Ltd (CA) 13 July 2000 the court decided execution of formal subcontract documentation was not a condition precedent to the existence of a binding contract. All essential terms had been agreed and it was clear that the parties were not working under the letter of intent.

In Durabella v J. Jarvis & Sons Limited [2001] EWHC 454 (TCC), the judge said:

“It is now well established where a “letter of intent” authorises work, materials or services to be provided pending the conclusion of some further agreement it will, if accepted, constitute a contract (or part of a contract) for what it requires”.

He also made the following key points:

  • “…in a commercial relationship the court will try to establish a contract since that would be consistent with the parties’ presumed expectations.”
  • “On the other hand a contract cannot exist unless it is clear that, viewed objectively, the parties were in fact agreed on all the matters which they considered necessary and which are necessary to form a contract.”

In the case of Harvey Shopfitters v ADI [2003] EWCA Civ 1757, Harvey offered to carry out alteration and refurbishment works for £339,895, which was followed by a letter of intent issued by ADI to enable the works to start early. In the letter it stated a contract was being prepared and the intent was to enter into JCT Intermediate Form of Contract 1984 edition (with amendments). The letter of intent also stated as follows:

“If, for any unforeseen reason, the contract should fail to proceed and be formalised, then any reasonable expenditure incurred by you in connection with the above will be reimbursed on a quantum meruit basis”.

As the works progressed, payments were made as though the JCT Intermediate contract was in use, until the final account stage, at which time the contractor then claimed there was no contract in force and it was continuing to operate on the letter of intent. On this basis, the contractor claimed costs on a quantum meruit basis. They cited a clause in the letter of intent that stated if a contract should fail to proceed then any reasonable expenditure would be reimbursed “on a quantum meruit basis”.

The Court of Appeal found that the court is entitled to look behind the apparent or literal meaning of the words of a letter, to determine the parties’ true intention. The court decided that a contract was acted upon and the quantum meruit scenario was only for use if the contract did not go ahead as planned. Consequently, it would be wrong to value the works on a quantum meruit basis. As the parties had carried out the contract as if the JCT was in force, they had ‘by conduct’ applied these conditions.

In Mowlem Plc (trading as Mowlem Marine0 v Stena Line Ports Ltd [2004] EWHC 2206 (TCC) the works were carried out under a series of 14 letters of intent, which the parties agreed were offers accepted by conduct. Each letter superseded the previous letters. The employer contended that the final letter of intent set out a cap on its liability for payment that any work carried out above the limit was at the contractor’s risk.
This final letter of intent expressly committed Stena to pay for works carried out up to 18 July 2003 and for works up to a value of £10 million.

Mowlem argued that Stena allowed them to carry out Works beyond 18 July 2003 and/or works that exceeded that value, and as a result Stena should then pay a reasonable sum for those works. Mowlem claimed in quantum meruit for the work that exceeded the £10 million cap. Stena argued that Mowlem was not prohibited from carrying out works after 18 July 2003, but insofar as Mowlem chose to carry out works after 18 July 2003, those works would be subject to the terms of the letter of intent, and in particular they would be subject to a cap of £10 million. The £10 million therefore represented a cap on Stena’s liability.

The court enforced the payment limit, with HHJ Seymour stating:

“…it makes no commercial sense to have a financial limit on Stena’s obligation to make payment which could be avoided by the simple expedient of continuing to carry out work after the final date. It would be even more bizarre if the financial limitation on Stena’s obligation could be avoided simply by the contractor exceeding the limit …”.

The case of Bennett (Electrical) Services Limited v Inviron Limited [2007] EWHC 49 (TCC) involved an application to enforce an adjudicator’s award. Bennett was engaged by Inviron Ltd (a mechanical and electrical contractor) to carry out the installation of electrical works. The dispute involved work carried out under a letter of intent. Bennett referred the matter to adjudication. Inviron asserted that the adjudicator had no jurisdiction as there was no binding contract between the parties, which was necessary to comply with s.107 of the Housing Grants, Construction & Regeneration Act 1996.

The adjudicator agreed and stepped down. Bennett referred the matter to a second adjudicator. That adjudicator concluded that he did in fact have jurisdiction and found in favour of Bennett, awarding over £250,000 plus interest. However, Inviron refused to pay. Inviron had raised several jurisdictional challenges, including that as there was no contract (merely a letter of intent), any remedy that Bennett might have was restitutionary and hence outside the scope of the Act.

Bennett sought to enforce payment of the adjudication award by way of summary judgement. The court held that there was no contract, as the letter of intent was clearly stated to be ‘subject to contract’ and the parties did not intend for it to have a contractual effect.

RTS Flexible Systems v Molkerei Alois Muller GmbH & Co. KG [2010] UKSC 14 is a Supreme Court case regarding a letter of intent that included a ‘subject to contract’ clause. The High Court held that the parties had entered into a contract after the expiry of the letter of intent, based on the conduct and negotiations that took place prior to the draft contract. RTS appealed the decision and the Court of Appeal found no contract had come into existence after the expiry of the letter of intent.

The Court of Appeal decision was then appealed in the Supreme Court. The court considered the words and conduct of the parties, and whether it could be objectively concluded that honest sensible businessmen in the position of the parties intended to enter legally binding relations. The court concluded that the idea that there was no contract was unconvincing. Where a contract is negotiated ‘subject to contract’ and work begins before the final contract is executed, it depends on the circumstances whether the parties had waived the subject to contract term. It was held that the unequivocal conduct of the parties led to the conclusion that they had made a binding agreement to waive the ‘subject to contract’ provision.

In handing down the judgment of the Supreme Court, Lord Clarke held that when a court considers the credibility of a letter of intent as a contract it should not consider the subjective state of mind of the parties. Instead, the court should objectively interpret the words and conduct of the parties to gauge whether:

“It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations”.

Lord Clarke concluded:

“The different decisions in the Courts below and the argument in this Court demonstrate the perils of beginning work without agreeing the precise basis upon which it is to be done.  The moral of the story is to argue first and to start work later”.

The case of Ampleforth Abbey Trust v Turner and Townsend Project Management Ltd [2012] EWHC 2137 (TCC) was between the employer and its project manager. The works were carried out under letters of intent, with the contract only being agreed after the works were complete. The contract contained a clause limiting the employer’s ability to claim for delay. The court held that the defendant owed a duty of care to the employer and had failed in that duty by failing to apply sufficient pressure on the contractor to finalise the contract.

The judge said of letters of intent:

“They do not protect, and are not intended to protect, the employer’s interests in the same manner as would the formal contract; that is why their “classic” use is for restricted purposes.”

In the case of Arcadis Consulting (UK) Limited (formerly Hyder Consulting (UK) Limited) v AMEC (BCS) Limited (formerly CV Buchan Limited) [2018] EWCA Civ 2222, the Court of Appeal considered various communications in order to determine the terms on which two parties contracted for design work and whether a cap on liability was agreed between them.

AMEC was engaged by the main contractor (Kier) to carry out specialist concrete works on Castlepoint Car Park (“Castlepoint”) in Bournemouth. AMEC in turn engaged Arcadis to carry out design work on the project. Problems began in May 2005, when masonry fell from the top floor of Castlepoint’s car park onto the floors below. Castlepoint was ultimately demolished and rebuilt. Having settled its dispute with Kier, AMEC sought damages from Arcadis of around £40m.

The dispute turned on what terms AMEC and Arcadis had agreed for the Castlepoint work, and in particular whether Arcadis’ liability was capped by those terms. The parties had agreed to enter into a ‘Protocol Agreement’ to govern all projects for which Arcadis was engaged by AMEC, but at the time the Castlepoint work commenced the Protocol Agreement was not finalised. At around the same time the parties were also negotiating the terms for a separate project, the ‘Wellcome Building’.

Between November 2001 and August 2002, several items of correspondence were exchanged between the parties, some of which attached draft terms. Arcadis commenced the Castlepoint design work around March 2002. No agreement governing the Castlepoint project was ever signed, and the protocol was not finalised during the Castlepoint project.

The correspondence between the parties included as follows:

  • 08 November 2001: An email referring to the Wellcome Building project, but did not mention Castlepoint, attaching terms which included Condition 2A, limiting liability for defective work to the lesser of (a) “The reasonable direct costs of repair, renewal and/or reinstatement of any part or part of the Sub-Contract Works to the extent that the Client incurs such costs and/or is or becomes liable either directly or by way of financial contribution for such costs”; or (b) “The sum stated in Schedule 1”, which was left blank. (“08 November 2001 Terms”).
  • A further set of terms issued on 29 January 2002 which varied those issued on 08 November 2001 and proposed a limit liability in the sum of £110,000 (“January 2002 Terms”).
  • A letter from AMEC on 06 March 2002, which instructed Arcadis to “commence design and detailing work” on Castlepoint and stated that the work was to be “carried out in accordance to the Protocol Agreement and Terms and Conditions associated that we are currently working under with yourselves” (“First Letter of 06 March 2002”).
  • A second letter from AMEC on 06 March 2002, which attached various schedules, one of which referred to “The limit, if any, on [Arcadis’] liability (as referred to in Clause 2A) is £610,515 – 10% of sub-contract package for uninsured losses” (“Second Letter of 06 March 2002”).

In terms of the main contract, on 20 February 2002 Kier instructed AMEC to start work on the Castlepoint pursuant to a letter of intent. There was a reference to AMEC’s liability not exceeding 10% of the value of the sub-contract, which was about £6.1 million. However, Arcadis knew nothing of this at that time. The final sub-contract between Kier and AMEC was not concluded until October 2002.

In the Technology and Construction Court (“TCC”), the judge held that the parties’ contract had been formed by the First Letter of 06 March 2002 (which was a letter of intent), along with Arcadis’ acceptance of that letter either by its subsequent letters, or by its conduct in undertaking the work. The court also found that because none of the sets of terms exchanged between the parties had been clearly and unequivocally accepted by Arcadis, there was no contractual limit on Arcadis’ liability to AMEC.

The Court of Appeal generally agreed with the TCC in respect of when the contract was formed i.e., by the First Letter of 06 March 2002 and Arcadis’ acceptance in correspondence (or more likely) by conduct of all the terms of that letter. However, it crucially overturned the TCC’s ruling in respect of a cap, finding that the TCC had erred in failing to distinguish between the ‘interim contract’ (the Contract) and the Final Contract (i.e., based on the Protocol Agreement), which was intended to supersede the interim contract once agreed. The Court of Appeal said:

“ I consider the parties had chosen “to stop the music” in relation to the terms that applied in the interim in relation to the Contract but not in relation to the Final Contract. But it was clear that once the final terms had been agreed, they were to supersede the interim terms for the purpose of all of the projects”.

The Court of Appeal held that, although the 08 November 2001 Terms were specifically stated to relate to the Wellcome Building project, they were the agreed terms in place between the parties as at the time of the First Letter of 06 March 2002 and it was these terms that were referred to and incorporated by reference into it. Consequently, any liability of Arcadis to AMEC was subject to condition 2A (a) of the 08 November 2001 Terms.

In Anchor 2020 Limited v Midas Construction Limited [2019] EWHC 435 (TCC), the contractor wanted to be paid on a quantum meruit basis, rather than under the (amended) JCT Design and Build Contract 2011 that it finally signed.

After the contractor signed the contract, there were disagreements about whether the contractor’s risk register should be included as a contract document. Despite this, the works continued and practical completion was achieved. The court held that despite the employer not signing the contract, the partially signed contract was binding upon the parties. The court concluded that (i) both parties had a clear intention to create legal relations; (ii) the essential terms had been agreed; and (iii) the contractor had completed the works in accordance with the terms of the contract. Hence, the contractor should be remunerated according to the contract.

Conclusions

There are often pressures to commence works prior to the finalisation of complex contract documents. Letters of intent can be a useful instrument for securing the early engagement of a contractor or consultant, where commencement of work prior to signing of the formal contract is necessary.

A letter of intent is not a substitute for a contract, but is sometimes a necessary intermediate step to agreeing the contract. However, it is clear that when parties commence work prior to agreement of all the essential terms, there is a significant risk of disputes.

When most projects commence the relationships between the parties and consultants is usually excellent, with an assumption that the work will proceed without significant complication. At this point, the use of a letter of intent does not seem so perilous. However, when unexpected expenditure and/or delays occur, relations can breakdown and agreement on all essential terms can become far more challenging.

As the meaning and effect of a letter of intent is dependent upon each individual case, including the subsequent conduct of the parties, there is much ambiguity surrounding their contractual effect.

If there is a binding letter of intent and a contract is subsequently entered in to by the parties, the terms of the contract will usually govern retrospectively the works carried out under the letter of intent. Where there is a binding letter of intent, but no subsequent agreement of a final contract, the works will be dealt with on the terms of that binding letter of intent.

Playing with Fire! – A Brief Guide to Letters of Intent

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