Dear Tony, I have been seeing a contractor for some time now, and although he says he loves me, he will not commit to a serious relationship. What should I do?
Come on, own up. who invented the letter of intent? Whoever it was has a sense of humour. Better yet is the smile brought on by a short form order. A what? A short form order. That’s what Sir Robert McAlpine used when edging its way into a relationship worth £35m with M&E subcontractor Emcor Drake & Scull.
Let me tell you about the affair. By the way, my thanks to Ellis Baker and Anthony Lavers of solicitor White & Case for pointing to this one. This is one of those whopping PFI hospital jobs. Dudley hospital trust arranged for a load of work to be done by a consortium called Summit Healthcare, which placed all the construction work with McAlpine. The M&E subcontract was to go to Emcor Drake & Scull.
So why not just get the contract placed? And if it wasn’t that simple, why not sit back and do nothing until the ink was dry on the contract? The answer is easy. It’s the pre-marriage honeymoon period. McAlpine and Emcor are holding each other by the hand. The hand takes a little while yet to migrate to the throat. And while the friendly stage reigns, folk do things for each other. Prelim work gets started; then work on this wing or on this floor, then the basement, then the annexe … And meantime the honeymooners haven’t actually tied the knot. Commerce has got in the way of legal niceties.
McAlpine’s answer to the problem of the paperwork for this £35m job was to use the oddball device of a short form order. It was sent to Emcor to “allow the commencement of design and procurement of long lead-in items for the project to ensure compliance … with the contractor’s programme for the whole works … limited to £1m”. Push that wording under many a lawyer’s nose and said nose will wrinkle. But commerce takes a robust, realistic, sometimes sounder view. The short order wording has the smell of roses. Actually, McAlpine cancelled the £1m short order and placed a £3m jobby and then an £8m, then a £14m. By then a year of work had been done. Emcor had a think. It wanted the £35m contract settled. It would sweep up and include all the work done thus far under the rules and contract documents of the subcontract. Proceeding in this ad hoc way is to live with massive uncertainty and the risk of an explosive dispute. These short form orders were in truth letters of intent by another name. And letters of intent are, believe me, a hostage to fortune.
When Emcor pressed for certainty, McAlpine did, in all fairness, raise the contract bundle. But the loose ends, now “tidied-up”, were not quite what the other side expected or agreed. This happens time and again. The short order or letter of intent is a pro-tem agreement to do something, heaven knows what, while the parties continue to negotiate. Then the negotiations get quarrelsome, even gruesome. Then what? By now the happy couple are a tad fed up with each other. One side may even want to clear off all together because some bad habits have come to light.
Now then, nobody can say that Emcor or McAlpine were fed up with each other; it was Emcor that wrote saying that it was high time that the £35m contract was brought into life. McAlpine suggested instead that the short form order be increased to – wait for it – £35m! Emcor declared it wouldn’t go on like this and issued an ultimatum: it was time to agree contractual terms or Emcor wanted an amicable separation, in which case it would work on for three months while McAlpine sorted out a replacement. McAlpine now said that in law the contract for the whole of the £35m work package had come alive. Then it said that if Emcor walked away, it would be a breach of that contract, which would raise a claim in damages.
And so the pattern of letters of intent takes a familiar turn. The couple are totally at odds. McAlpine stopped £1m from what Emcor was owed and mounted a counterclaim for £3m, saying there was a duty to complete the whole of the M&E works. Sometimes that can be the correct analysis, because the negotiations between the parties are enough to form the whole contract. But in this particular case it went the other way. Emcor was not bound to complete. It could quit on reasonable notice whenever it thought fit.
As for letters of intent or short form orders, they work well – for those who can keep a honeymoon going on and on.
Tony Bingham is a barrister and arbitrator specialising in construction. You can write to him at 3 Paper Buildings, Temple, London EC4 7EY, or email him on firstname.lastname@example.org