Subcontractors too must beware of relying on a letter of intent as the courts have made clear that its use may jeopardise the right to adjudicate and thus make the pursuit of claims under the letter more difficult

Nobody likes to wrangle over the detail of a contract, especially when there’s work to be done. The need to get works swiftly under way, coupled with the well-meaning intention to agree a full contract later, makes the letter of intent a tempting prospect and, when used properly, a useful tool.

However, once parties have agreed a letter of intent, the need to agree a full contract is often forgotten or put to one side. This is when letters of intent can have a number of unintended, and unwelcome, consequences.

The potential pitfalls of letters of intent should, by now, be well known to employers and contractors. The absence of a clear and comprehensive contract often leads to disputes over the scope of work and claims for further payment.

Until recently, however, the parties engaged under the letter of intent (most commonly, subcontractors) may have had cause to feel safer. Where extra payment was claimed, such a party could seek it either under the letter, under the full contract (if that had subsequently come into existence) or often as a quantum meruit claim, for the reasonable costs of the work carried out.

However, recent decisions in the Technology and Construction Court show that subcontractors too must beware, as the use of a letter of intent may jeopardise the right to adjudicate and thus make the pursuit of claims under the letter, whether meritorious or otherwise, more difficult.

In the recent case of Bennett (Electrical) Services vs Inviron, Inviron had engaged Bennett (a subcontractor) under a letter of intent to carry out labour-only electrical installation works. The letter of intent was headed “subject to contract” and stated the intention of the parties to enter into a full subcontract, incorporating Inviron’s standard terms and conditions. The letter instructed Bennett to proceed with the works required to progress the subcontract, and Bennett duly did so.

The judge said the whole letter was subject to contract and could not have given rise to a contract

However, the full subcontract was never entered into. When a dispute arose over a claim by Bennett for extra payment, Bennett commenced adjudication under the letter of intent. Inviron challenged the adjudicator’s jurisdiction. It argued that the letter of intent was subject to contract. Further, it argued that the letter of intent did not comply with requirement, set out in section 107 of the Construction Act, that contracts to which adjudication provisions apply must be wholly in writing.

The adjudicator accepted the challenge and resigned. Bennett, however, commenced a second adjudication before a second adjudicator. This time Inviron’s objections were rejected and the adjudicator gave a decision, awarding further payment to Bennett.

When Bennett sought to enforce the award in court, Judge Wilcox considered Inviron’s jurisdictional challenges. He held that in this case, “subject to contract” had its ordinary meaning – that is to say, legal liability would not arise until the anticipated full contract was entered into. The whole letter was stated to be subject to contract, and the letter could not be said to have given rise to a contract between the parties.

Further, it was noted that the letter of intent itself referred to a meeting in which the terms of the contract, additional to those set out or referred to in the letter, were agreed orally. In addition, the works mentioned in the letter had been subject to significant oral variations.

Following the Court of Appeal’s decision in RJT Consulting engineers vs DM Engineering, the judge held that an agreement would fall foul of section 107 of the act if all of its express terms were not recorded in writing. Accordingly the adjudicator did not have jurisdiction, and Bennett’s attempt to enforce the award failed.

Typically, letters of intent are issued as a temporary measure, pending the agreement of a full and binding contract. But as this case illustrates, such arrangements, by their nature, may fail to constitute a binding contract and therefore fall foul of section 107.