Letters of Intent are common construction. On their own, they mean little.
However, they often incorporate an Instruction to Proceed, which allows the works to proceed while the contract documents are being finalised and agreed. This instruction is often limited in time, scope or financial value.
As RTS and Müller discovered, people can forget or ignore the limitations of the Letter of Intent. What’s more, if the Letter of Intent has been poorly drafted, it can permanently limit the parties to rights and obligations they were only willing to accept temporarily.
Contracts are formed by offer and acceptance. As the acceptance can be by conduct, courts can, and often do, find that a contract has been formed in this way.
But it is important to clearly understand whether undertaking the work forms the contract or if it is being progressed pending a formal contract.
If the formal contract has not been signed, the uncertainties complicate any other dispute and increase the parties’ costs as legal arguments and court hearings are needed to determine whether a contract has been formed and under what terms.
RTS was working according to Müller’s Letter of Intent which had a definite (although extended) expiry date. Furthermore, both had agreed that a contract would not be formed until the parties had signed it.
Of course, they could have agreed further extensions to the letter before it expired. Had they done so they would have been spared the expense of having the Court of Appeal decide whether or not a contract existed.
Ann Wright is an adjudicator and quantity surveyor. Tel: 01675 466 009