Letters of intent are commonly used in the construction industry in order to induce a party to undertake work or incur expenditure. They are used in a number of circumstances, for example, to commence construction before the expiry of planning permission, or to start work quickly in order to have a project completed by a particular date.
Letters of intent tend to have potential for creating disputes. Disputes may revolve around whether or not the letter is a binding agreement. If the letter is binding, further difficulties may arise as to whether the letter is a standalone letter or whether it incorporates the proposed contract conditions to be used in the main-contract. In Cunningham v Collett & Farmer [2006] EWHC 1771 (TCC), Coulson J, when referring to the difficulties associated with letters of intent, commented that such letters:
‘[C]an create many more problems than they solve … the principal problem with letters of intent is a practical one: once they have been sent, and the contractor has started work pursuant to that letter of intent, all those involved, including the professional team, can easily take their eye off the ball and forget about the importance of ensuring that the full contract documents are signed as quickly as possible.
‘Everybody is then so busy dealing with the day-to-day problems being thrown up by the commencement of the works themselves that the task of signing off an often complicated set of contract documents is relegated to an item of secondary importance. Then, very often, something goes wrong on site and, in the absence of a full contract to regulate the parties’ rights and obligations in such circumstances, the result is confusion and acrimony.’
In ERDC Group Ltd v Brunel University [2006] EWHC 687 (TCC), Humphrey J, when commenting on the types of letters of intent, stated that:
‘Letters of intent come in all sorts of forms. Some are merely expressions of hope; others are firmer but make it clear that no legal consequences ensue; others presage a contract and may be tantamount to an agreement “subject to contract”; others are contracts falling short of the full-blown contract that is contemplated; others are in reality that contract in all but name.’
Construction Contracts Act 2013
Consequently, some letters of intent may fall within the scope of
Construction Contracts Act, 2013, while others may not. It is difficult to predict with any certainty how the courts or other tribunals will construe letters of intent and much will depend on the precise wording used, the conduct of the parties and the facts of a particular case.
It may be overlooked by some, but the Construction Contracts Act applies to legally binding letters of intent relating to the carrying out of construction operations as defined in the Act. The reason for this is that a binding letter of intent creates a simple contract. Therefore, items not previously associated with letters of intent will now come into play. These include payment notices, suspension and adjudication.
The drafters of letters of intent must ensure that letters comply with the provisions of the Construction Contracts Act. Contractors and sub-contractors when claiming payment for work carried out on foot of a letter of intent must comply with the notice provisions of the Act. Adjudicators, when faced with deciding a payment dispute, may first have to decide whether or not the letter of intent forms a binding contractual relationship and, if so, are the proposed conditions of contract incorporated into the letter?
A payment claim may turn on this point. For example, if an adjudicator finds that the
International Federation of Consulting Engineers (FIDIC)
Yellow Book is incorporated into the letter of intent, then a contractor may be entitled to an extension of time, reasonable costs associated with a delay and reasonable profit. However, if an adjudicator finds that the
FIDIC Yellow Book is not incorporated into the letter of intent, it is unlikely that a contractor would recover these items.
In order to avoid the difficulties associated with letters of intent parties may consider using a full contract in the form of one of the standard forms for minor works. Employers can reduce the necessity for using letters of intent by selecting an appropriate procurement route at an early stage. If time is a key concern, a design and build procurement route may be most appropriate as design can be overlapped with construction.
Employers may also decide to use a two-stage tender approach, whereby, the employer selects one contractor from the first stage and then works with it during the second stage. The second stage ends with a final agreement and execution of a construction contract. In these circumstances a ‘Pre-Construction Services Agreement’ is preferable to a letter of intent as it is more detailed.
Author:
Paul Hughes MSCSI, MRICS, MCIOB, Barrister-at-Law, PhD
info@constructionclaimsresolution.ie | www.constructionclaimsresolution.ie
Hughes Construction Claims Resolution (HCCR) provides a comprehensive construction claims service in relation to the conduct and management of claims, adjudications, conciliations, mediations and arbitrations. It offers its services to all involved in the construction industry including contractors, sub-contractors, clients, suppliers and design professionals.