Sometimes it is precisely the thing that someone tells you they are relying on for comfort that alerts you to the fact that something is amiss. In fact, this bovine exchange calls to mind certain conversations I have had with consultants over the years. ““Doesn't it worry you sometimes, that you still have no contract for this job you’re already halfway through?” “No,” comes the response. “I’m not worried at all because I’ve got a letter of intent.”
The trouble with letters of intent is that, as often as not, no one has any clear idea exactly what that intent was. Was the idea to create a legally binding commitment? Or was it just acknowledging the hope of concluding a contract somewhere along the line, but in the meantime keeping the exit door wide open? And, even if there is evidence of a clear intent to create legal relations, is there sufficient certainty on fundamental issues? If not, the letter of intent will not be binding on the parties.
Not being the life-raft they are sometimes thought to be, letters of intent have for years received bad press in legal circles. However, in the construction industry, where contractual negotiations are often complex, letters of intent remain music to the ears of service suppliers such as consultants and contractors.
Their memories are scarred by the recollection of smiling nervously at their client across a meeting room table while their respective lawyers slip into Rottweiler mode and savage one another over formal contract terms. They look on as all that carefully nurtured goodwill sprouts wings and flies away. So letters of intent are viewed as a harmonious interim arrangement, even if there is the risk that they eventually prove to be invalid.
It has to be said, though, that certain cases over the past few years, such as VHE Construction Ltd vs Alfred McAlpine Construction 1997, suggest that the courts are now a little more inclined to find that a letter of intent does in fact constitute a contract, provided that there is evidence that it was the parties’ intention to be bound.
Of course, as client or supplier, you may not want your letter of intent to be legally binding, in which case you simply need to say so in the letter itself. But if you do want to give your letter the best fighting chance to make it to contract status, how do you achieve that?
- First of all, state that there is an intention that the letter be legally binding.
Sometimes it is precisely the thing that someone tells you they are relying on for comfort that alerts you to the fact that something is amiss
- Clarify all the essential terms with certainty, including the scope of works, payment, insurance and termination.
- State that, in the absence of a contract, the letter of intent shall apply throughout the job but, if a contract is later signed, the contract terms shall apply retrospectively.
- Ensure that there is “consideration” (that is, ach party must provide something of value to the other), and the other party must have accepted the letter.
If this all sounds suspiciously similar to the requirements for an actual contract, it is – because you will, indeed, have turned your letter into a contract: a mini-contract. The down side, of course, is that it will not contain the detail of a full formal contract, so it will no doubt leave a cloud of obscurity over many issues.
If, despite your best efforts to turn it into a contract, a judge holds up your treasured letter of intent disdainfully between thumb and forefinger and pronounces it worthless, all is not quite lost. Provided that you establish that you carried out the work at the client’s request, or at least that it was aware of your work and did not discourage it, the courts tend to award damages on a “quantum meruit” basis. This basically amounts to fair and reasonable payment according to the market value of the work, which may be rather less than your standard contract rates, but a good deal better than nothing.
It is not too difficult to persuade a judge to make such an award in these circumstances. His Lordship may still struggle to name all the Spice Girls, but he does have his finger sufficiently well placed on the pulse of society to realise that people do not generally spend their time and effort working for someone else’s benefit without any prior agreement as to remuneration.
Still, quantum meruit payment has to be the last resort. If you take the steps suggested above, you should not need to rely on it. Your letter of intent can be elevated to contract status and so achieve your intent after all.
Postscript
Melinda Parisotti is a barrister and a director of Wren Managers Ltd, which manages a professional indemnity mutual for architects.
