Ormston Consult

Below is an article which Peter has written for Builder and Engineer Magazine September Edition
 

Letters of Intent Continue to Be Fertile Ground for Disputes

In these tough times clients and contractors are keen to commence work as quickly as possible but often an element of negotiation may still be required tensions arise where the client wants to get the contract moving and the contractor is reluctant to commit resources in the absence of some agreement which guarantees payment.

In such circumstances parties often resort to the use of Letters of Intent: so far so good but reality bites when the Letter of Intent is the only paperwork for the project and the parties fall out. What happens then? The English Courts have cautioned parties against starting work on projects without having a contract in place for good reason as its often left to them to sort out if there is a contract, and that is an expensive way to reach agreement on your contract terms.

When presented with a Letter of Intent one of the first things the Courts will consider is whether the Letter is legally binding remember it is the contents of the Letter that is important and not just that it is described as a Letter of Intent. As a rule a Letter which states it is an agreement to negotiate or an agreement to agree further terms are unenforceable as a contract. If the Letter is expressed as non-binding this will generally be upheld by the Courts.

Letters of Intent can in some cases form a contract. For example in the 2008 case of Diamond Build Ltd v Clapham Park Homes the court held that the inclusion of key terms in the Letter including commencement and completion dates, a requirement to proceed regularly and diligently, the overall contract sum and an undertaking to pay reasonable costs in the interim, created sufficient certainty to give rise to a contractual arrangement.

Letters of Intent often provide a financial or time limit to limit the client’s exposure and provide some financial comfort for the contractor. Where a financial cap is stated in a Letter of Intent, this will normally be upheld by the court. In the case of Mowlem plc v Stena Line Ports Limited, the contractor`s entitlement to payment for works carried out was held to be subject to the limit stated in the Letter of £10 million. The court held that no term would be implied that the contractor was to be paid a reasonable amount for work carried out beyond the expiry date of the Letter.

Letters of Intent in the construction industry are here to stay if well drafted can be useful if the risks are assessed and understood by employers and contractors on a project specific basis. But every effort should be made in finalising and entering into the contract as soon as possible to reduce misunderstandings and disputes.