Letters of intent are often used inappropriately in the construction industry and, as such, they should be employed with a good deal of caution – or not at all
Are you about to recommend or use a letter of intent? If so, do two things straight away: read the case of Cunningham vs Collett & Farmer, and then take a bargepole out of the bargepole cupboard.
Collett & Farmer is a firm of architects. Its client for the refurbishment of Bengeo Hall, an exquisite, grade II-listed Georgian house, was Robert Cunningham and Catherine Good. Not a massive job – about £500,000. But, oh dear, oh dear, the four-year story goes from bad to worse. There has been litigation between contractor and employer about the letter of intent, then more litigation between Cunningham and Good and their architect about the letter of intent and more besides. And now, Bengeo Hall is incomplete and uninhabited.
The architects prepared detailed drawings and specs, then invitations to tender were sent out. Construction company Eugena was lowest, but the bid was still over budget. So the parties agreed that works would commence “pursuant to a letter of intent” while a variety of savings and other bits and bobs were sorted out. Familiar? The total contractual relationship between contractor and employer never materialised and in due course the contractor left site never to return. There was a court case two years ago, but that part of the story is still not fully resolved. As for the architect, it has been quietly sitting on the sidelines waiting to be paid its outstanding fees. It too suspended its services. That was three years ago.
Cunningham and Good decided to sue the architect for about £450,000 on the grounds that that it gave them inadequate advice. They claimed for things alleged to have gone wrong because of the letter of intent, but they also said: “The JCT minor works form was inappropriate and caused loss, not enough bids were invited from main contractors, insufficient development of the design had been done, there was no agreed main contract price, no agreement of the security/escrow account required by the contractor, no structural engineer in place in time, the letter of intent was said to be premature and in any case no advice was given about the risks regarding letters of intent.”
The judge, after seven days of trial, decided that none of the allegations were founded.
Of the £450,000 claimed, not a penny was won, and Collett & Farmer was awarded the balance due.
Architects beware. If you give wrong advice about which contract form to use and cause loss, you are in the frame for a claim
Notice that the judge said there was nothing intrinsically wrong with choice of the JCT minor works. But architects, beware. If you give wrong advice about which form to use and cause loss, you are in the frame for a claim. Then there was the allegation of an insufficient number of tenders. Architects beware again. If through a limited bidding process your client unwittingly enters into a contract at too high a price, you are in the frame again. As for insufficient design, if this caused delay, there could be a claim here too.
As for the letter of intent, Judge Coulson reminded us that they “are used unthinkingly in the UK construction industry” and can create more problems than they solve. A common type of letter of intent gives no authority and creates no rights or obligations. And yet some folk act on them!
Another type gives rise to limited rights and liabilities. Of course, in real life, folk tend to get on with the job and not actually enter into the intended contract. Sometimes the letter is used in the hope that once work is under way, potentially difficult contract issues will somehow resolve themselves.
The judge said that letters of intent can be inappropriate. But sometimes it is a good way of ensuring the works can start promptly with a clear timetable for the finalisation of the contract formalities and for carrying out the works themselves. But the point is that if you are an architect, QS, engineer, lawyer or consultant, watch out if you advise about using a letter of intent.
The judge gave some useful guidance about when to use a letter of intent, listing the following circumstances where they are appropriate:
- The scope and price of the works are agreed or there is a clear mechanism in place for an agreement to be reached.
- The contract terms are (or are likely to be) agreed.
- The start and finish dates and the contract programme are broadly agreed.
- There are good reasons to start work sooner rather than later.
Tony Bingham is a barrister and arbitrator