A letter of intent is a valuable interim measure before agreeing a contract. Unfortunately there has never been a standard form to use - until now
When it comes to construction, there are few better moments than when works start on site. That's when people know that all the hard work is coming to fruition. With a good wind and more hard work, she's going to fly.
It can also be a risky time. Employers and contractors may have a race against the clock to get things in order, particularly when it comes to the building contract and any related documents. In an ideal world, contracts are pored over, agreed and executed before works begin. But if that can't happen, we have to be practical. That's where letters of intent come in.
The Construction Law Committee of the City of London Law Society has been seeking to improve construction legal practice. The members have observed the use of different forms of letters of intent across the industry. They range from the proverbial back of a fag packet to voluminous forms that resemble a building contract in their own right. In the absence of suitable published forms being available to the industry, the committee has drafted a standard form letter of intent and guidance notes, which can be downloaded free from www.citysolicitors.org.uk - scroll down and click on the Construction Law Committee section.
A letter of intent is not a panacea for all ills, but there is a belief that, if properly adapted for use, it can greatly assist both employers and contractors
First of all, though, here's a health warning. Don't use the letter of intent form if the proper legal documentation can be put in place safely and in good time. Further, don't use it as a substitute for a building contract. I have seen what can happen: parties enter into a letter of intent and forget about concluding the contract. Later, all hell can break loose if problems arise on site or if the employer needs a building contract to sell or let the property.
If you look at the standard form letter of intent, you will see that there are a number of mechanisms used to manage risk. These include:
- Identifying the scope of the works to be carried out. It is better to allow early elements of the works to proceed, but not for all of the works. This limits both the employer's and the contractor's exposure if, for whatever reason, the building contract does not proceed and works have to be wound down.
- Setting a time limit for the operation of the letter of intent. This helps to focus the parties' minds on the fact that they only have a limited window in which to conclude the building contract in a timely manner. Typically, this is calculated in days or weeks, but not months.
- Providing a financial cap as to the employer's liability. Ordinarily, a contractor and employer should be able to agree an indicative price for the limited scope of works to be carried out. It provides a tool for managing the employer's financial exposure and ensures that the contractor has sufficient payment security to proceed with the limited scope of works.
- Identifying matters that are agreed and are still to be agreed. This will assist the parties in the event that there is any question raised as to what was agreed and what remains to be agreed. Be aware that if this list is lengthy or complex, it suggests that the risks of using a letter of intent may be unsatisfactorily high.
- Establishing a sensible contractual framework for works to be carried out and administered. This is achieved, in part, by incorporating the agreed form of contract, which should provide the raft of mechanisms needed for such things as the giving of instructions, submission of applications for payment and the valuation and payment of money due.
- Providing a fall-back position in case the building contract negotiations break down. It is best to prepare for the unexpected. Under this general principle, there are provisions governing termination and payment for works carried out, copyright provisions to regulate intellectual property rights and a sensible regime for winding down the works commenced.
Matthew Jones works at law firm Travers Smith and can be contacted at firstname.lastname@example.org