Use letters of intent only while details are finalised

Feb 1 2008 by Chris Knox, The Journal

A LETTER of intent is what it says – a letter from an employer of their intention to enter into a contract in the future.

It is not a fully detailed contract or a watered down version of one, but simply a letter of comfort from one party to another.

It should be used only while the detail of a formal contract is finalised. The “normal” rules of contract will not apply as the letter has no binding effect.

Traditionally however contractual effect is introduced into letters of intent and the parties enter into what is known as an “if” contract.

In other words, a contract under which A requests B to carry out certain work and promises B that if B carries out the work, A will pay them for that work.

Parties should understand the usual contractual principles which would normally apply to a building contract may not apply.

An example of the appropriate use of this letter of intent is where an employer is attempting to secure funding for a complete scheme but cannot let a building contract, because it does not have full financial backing. He can bring in a contract or for preliminary works through a letter of intent.

This assures the contractor he will get the work and the funder that the contractor is on board.

The letter should be short, have a cap on cost and liability, establish the standard and duty of care owed and have a defined work schedule.

It should NOT purport to incorporate a full schedule of works and conditions. If parties need to go into such detail, they should finalise a full contract. A letter of intent in these circumstances may lead to confusion and dispute.

Mowlem Plc discovered the pitfalls of using a letter of intent when they accepted a letter issued by their employer, Stena Line Ports Ltd.

The letter of intent, which came before the courts in 2004, said a maximum of £10m could be paid to Mowlem for the work it carried out.

Mowlem claimed to be entitled to additional monies by way of valuation of the actual work it did.

Unfortunately, the court held firm on the letter’s interpretation which clearly stated payment would be “subject to the maximum amount [of £10m].”

The mistake Mowlem made was they continued to carry out works in the mistaken belief this wording could be overridden.

What they should have done was stop work because the financial cap had been reached, which under this letter of intent they could do without penalty.

Lawyers advise against letters of intent because of the pitfalls.

Contractors and employers continue to use them because they are apparently easy and convenient to draft to get work off the ground.

Specialist advice should be sought if you need to use one.

For more information on Constructing Excellence in the North-East, please contact regional director, Catriona Lingwood, on (0191) 383-7435 or catriona@constructingexcellence-ne.org.uk.

Andrea Gardner, Partner, Construction and Engineering Team, Blackett Hart & Pratt