Best intentions

As a specialist contractor, it may be preferable if the letter of intent is not legally binding. A true letter of intent reflects preliminary agreements or undertakings of one or more of the parties to a contract. It is an initial step towards a final contract. There can be no complaint by any prospective party should a contract not materialise.

If however, it is desired, for whatever reason, that a letter of intent should have contract status, then you should do the following:

In between these two positions is the grey area. A letter of intent may seek to encourage the other party to take action or incur expense in the anticipation of a future contract without the sender of the letter incurring any obligation to enter into a contract. The position here is normally that there is no obligation to enter into a future contract.

However, there will generally be an obligation to pay for any action taken under the letter if it provides a benefit to the sender of the letter, unless the letter clearly anticipates no charge. The basis for this is that there is a presumption that a company is entitled to be paid for the works or services that it provides.

One final scenario which may arise in a construction project, is where the parties agree orally to begin work without entering into a letter of intent or any letter at all. They then continue to discuss the essential terms concurrent with the actual works. If in due course the parties then enter into a contract, the date of the contract will be the date of the written agreement.

Atlas Ceiling & Partition Co –v- Crowngate Estates (Cheltenham) (2000) Works commenced in January 1998 pursuant to a letter of intent which stated that, "In the event that a contract is entered into between us it shall have retrospective effect to include all works carried out under this letter of intent". The court found that the contract came into existence in April 1999. The court held that although the contract had retrospective effect, the date specified in the contract was the date of the contract.

Therefore the provisions of the Housing Grants, Construction and Regeneration Act 1996 applied, although works commenced before May 1998, when the Act came into force.

While the formal contract had retrospective effect to govern the parties' rights pursuant to the letter of intent, it did not mean that for the purposes of the Housing Grants, Construction and Regeneration Act 1996, the date the contract was entered into was similarly to have retrospective effect.

It should be noted that even if the letter bears the title letter of intent it can still be a construction contract if it contains all the agreed material terms. The stipulation in the letter of intent that "formal contracts are to be drafted" may simply mean that the letter will be re-jigged into a formal contract.

Stent Foundations Limited –v- Carillion Construction (Contracts) (2000) Stent (a subcontractor) was instructed to proceed with work pursuant to a letter of intent from a third party (the developer).

“Even if the letter bears the title letter of intent it can still be a construction contract if it contains all the agreed material terms”

There was a provision that Stent was required to enter into a subcontract in the form of the JCT Management Form with the developer after the developer had entered into a main contract with the Defendant (the managing contractor).

The main contract was signed, but no formal contract was ever drawn up between Stent and the developer. It was held that as the parties had agreed all the essential terms of the subcontract which was to come into existence upon the conclusion of the main contract, a binding subcontract came into existence, without the requirement of a formal contract, once the main contract was concluded.

If the court decides that a letter of intent is not a contract, all is not lost. Provided that you can establish that you carried out the work at the client's request, or at least that the client was aware of your work and did not discourage it, the court will award damages on a "quantum meruit" basis. This equates to a fair and reasonable payment according to the market value of the work.

There have been a number of cases in this area where the courts have found quantum meruit to mean a fair rate for services, yet there have been other cases where the court has awarded costs plus profit.

Serck Controls –v- Drake & Scull Engineering (2000) Serck carried out the design and installation work for Drake & Scull on a job involving the replacement of a research and development facility for British Nuclear Fuels.

   A letter of intent was issued offering reasonable remuneration if no contract was signed. Authority to start work was given but no programme, or terms and conditions were agreed.

It was conceded that Serck was entitled to be paid on a quantum meruit basis. The Court held that there were no rules limiting the way a reasonable sum should be assessed. As the letter of intent referred to "reasonable remuneration" the Judge held that Serck should be paid on that basis.

The Judge held that Serck should also be paid in respect of damages arising out of traditional delays and costs.

J Jarvis & Sons –v- Galliard Homes (1999) Although the parties in this case had agreed on a contract price, the express provision of the letter of intent was that no contract would come into existence until the parties had signed a JCT 80 contract.

The Judge held that the letter of intent was in effect "subject to contract" because the parties had not signed a JCT 80 and, in addition, the letter of intent lacked the fundamental requirement of certainty.

Although a price was agreed it was not clear whether it was a gross, maximum or lump sum price. As the true intention of the parties was unclear, there was in fact no contract concluded between the parties. Jarvis was therefore to be remunerated on the basis of quantum meruit.

The follow on from this case is that given that there was no contract between the parties, none of the provisions of the Housing Grants, Construction and Regeneration Act 1996 applied, including the adjudication provisions, service of notice to withhold money and the right to suspend work.

Careful consideration should therefore be given to letters of intent as to whether you want them to be legally binding, and therefore, whether the rights and remedies provided by the Housing Grants, Construction and Regeneration Act 1996 are to apply.