Letters of intent are often used while parties and their lawyers haggle over terms. But what happens when a contractor is required to work in accordance with terms still being discussed?
“We hereby agree to carry out our works in accordance with a set of contract conditions that we are half-way through negotiating with you” does not sound like a promising framework within which to begin construction work. Those words are of course only a paraphrase of what can sometimes be found in a letter of intent, but they highlight a typical problem. Where a contractor or subcontractor is required to work “in accordance with” some conditions that are still being discussed, what does the law say?
The recent case of Twintec Ltd vs Volkerfitzpatrick Ltd, (“VFL”) was concerned with an issue of this nature. The judge’s attempt to sort out the mess is instructive. It ended with his granting an injunction to stop the main contractor, VFL, proceeding with an adjudication. That part of the case has been discussed by Tony Bingham and Hamish Lal in these columns (7 and 21 March).
The letter of intent was issued by VFL to Twintec, which was to proceed with the laying of floor slabs in a warehouse “to achieve a design programme and the construction programme in accordance with” various listed documents. One of the documents listed was the DOM/2 standard form of subcontract (now out of date, though that was not relevant). The question for the judge was what was meant by the requirement to carry out the works “in accordance with” DOM/2.
VFL said that this meant that Twintec had to comply with all of the DOM/2 terms, unless they positively conflicted with the letter. But it would have been very strange to say that Twintec was obliged to comply with everything in DOM/2. For one thing, it would have meant Twintec being bound by DOM/2 clauses about payment and termination without getting any of the benefits of those clauses. For another, DOM/2 requires certain blanks to be filled in, and it was difficult to see how these blanks could properly be dealt with.
Although the judge’s solution was a sensible one, it was not one that any lawyer, seeking to advise a client as to what this letter of intent actually meant, would have necessarily come to
So the judge preferred to hold that Twintec’s obligations were more limited. The company was bound, he said, by the core terms of DOM/2 relating to design and workmanship. But it did not have to comply with “secondary” obligations relating to such matters as insurance and indemnities. Crucially, these secondary obligations included the clauses about dispute resolution. Since these were not part of the interim contract, Twintec succeeded in its argument that the adjudicator had been wrongly appointed - hence the injunction.
The judge’s attempt to find a solution that made sense of the wording in the letter of intent is commercial and practical. However, for main contractors which issue letters of intent requiring subcontractors to comply with the terms of some other subcontract, JCT or otherwise, the case should give pause for thought.
The judge ended up having to fashion a solution that involved his deciding which of the DOM/2 terms applied. Although his solution was a sensible one, it was not the only option. It was not one that any lawyer, seeking to advise a client as to what this letter of intent actually meant, would have necessarily come to. It could certainly not be described as obvious. Other cases centred around letters of intent - and the law reports have been full of them over the years - have featured a number of different results in situations where slight variations in the wording or the facts can make all the difference.
It is easy for lawyers to lecture their clients about the perils of using letters of intent. Often they fail to appreciate that if a letter is not issued promptly, the project may be derailed at the outset. Letters of intent will continue to be used while parties and their lawyers haggle over terms.
However, main contractors and others would do well to note the outcome in Twintec. The clause requiring Twintec to work “in accordance with DOM/2” led to the main contractor embarking on an abortive adjudication.
There is a good argument for avoiding these clauses altogether. Too often they end up working no better than the tongue-in cheek example at the start of this article. There is no point in trying to have all the benefits of a JCT subcontract without being ready to sign one.
One solution is for a letter of intent to refer specifically to a few key clauses from the JCT subcontract. That way, at least the main contractor gets to choose which clauses apply, rather than have a judge make the choice for him.
Ian Yule is a partner at Weightmans