The Effects of Letters of Intent
Click here to load reader
-
Upload
haneef-mohamed -
Category
Documents
-
view
231 -
download
19
description
Transcript of The Effects of Letters of Intent
No. 91. 1998 Editor: Peter HarlowE-mail: [email protected]
THE EFFECTS OF LETTERSOF INTENT
by J. B. McGuinness BSC, MSc, FCIOB
Professional ServicesThe Chartered Institute of Building
EnglemereKings Ride
AscotBerkshire
SL5 7TB
Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.
Editorial NoteThis paper won the 1997 Hudsonprize awarded by the Society ofConstruction Law.
Entries to the 1998 Prize are invitedo n a t o p i c c o n c e r n e d w i t hc o n s t r u c t i o n a n d e n g i n e e r i n gcontracts, contract administration,c la ims , a rb i t ra t ion and d i sputeresolution, litigation, torts, companylaw, property law, taxation and anyother aspect of law or procedurerelevant to construction.
T h e r e a r e t w o p r i z e s a w a r d e dvalued at £1500 and £750. Entriesshould not exceed 5000 words andshould be submitted to the Society’sM e m b e r s h i p A d m i n i s t r a t o r , 6 7Newbury Street, Wantage, Oxon,OX12 8DJ by 30 September 1998.
John started his career as an articled pupilwith John Laing and subsequently wassponsored for a Building degree at AstonUniversity He has worked for the LaingG r o u p f o r o v e r 2 5 y e a r s i n s i t emanagement roles and has been involvedwith a number of large prestigious projects,including the Falkland Islands Airport andthe new British Library.
In 1992-94 John took a part-time course inConstruction Law and Arbitration at KingsCollege, London.
INTRODUCTION
It is a feature of modern building contracting
that a significant number of both main and
subcontracts are let under a letter of intent,
the intention being to conclude a writtencontract short ly afterwards. Of those
projects which start with a letter of intent a
high percentage will never be concluded
and the work will be completed without an
agreement being reached as to the contract
terms and conditions.
Despite its frequency of occurrence there is
surprisingly little commentary in the legal
texts. Keating only devotes a page to
‘letters of intent’ and Hudson a page and a
half. Both make the point that the extent of
liability will depend on the
facts/circumstances of the case. This is of
little help to contractors or sub-contractors
who finding themselves with a contractual
problem need advice as to their obligations
and rights. Despite this lack of commentthere is, however, a reasonable body of
case law, which can be analysed to reach
some fairly clearly defined principles.
It is generally been held that a contractor or
sub-contractor, who undertakes work undera letter of intent does so at risk. This paper
demonstrates that this view is not supported
by law and that it is the party issuing the
letter of intent who is more often at risk.
One of the main reasons for starting a
contract under a letter of intent is to reach a
more advantageous agreement before
concluding a contract; in practice delay will
in most instances have the reverse result.
It will be shown that it is not necessarily the
act of issuing a letter of intent that leads to
difficulties in determining the status of the
arrangement between the parties but also
their action afterwards.
WHAT IS A LETTER OF INTENT?
A letter of intent is distinguished from other
ineffective or unconcluded contractual
proposals in that there will normally have
been on enquiry sent out by the purchaser
and a tender submitted by the supplier.
The tender is likely to have been qualified so
as not to be open to acceptance. Post-
tender discussions wil l probably have
‘fol lowed. At some point , when the
purchaser wishes work to start, he will write
to the supplier requesting he commence the
work in whole or in part and undertaking
some obligation, usually to pay money, if
the supplier does as requested.
This situation can be distinguished from
cases such as Felthouse -v- Bindley, where
performance was by the party writing and
the second party was to be liable for the
consideration.
FORMS OF LETTERS OF INTENT
A letter of intent can come in various forms
in response to differing needs of the
purchaser.
1. It is quite common, especially with sub
contracts, for the main contractor when he
has concluded his negotiations to issue a
works order for the sub-contracted work.
Typically such an order will state:
It is our intention to accept your tenderfor the XXX work on this contract. Pleasetake this order as an instruction to
commence work pending the finalisationof the contract documents for signature.
The sub-contractor may be required to sign
and return the order form, which may
expressly be a prerequisite to the sub-
contractor being paid for any work carriedout.
In these situations the terms and conditionswill have been agreed between the parties,
but the main contractor will need time to
finalise the documentation, which company
procedures may require to be checked by
the purchasing manager and/or signed by
a director, prior to issue to the sub-contractor.
2. Another form of letter of intent is to
allow a contractor or sub-contractor to start
p r e l i m i n a r y w o r k s u c h a s d e s i g n ,
procurement and/or mobilisation. In these
circumstances a limit on spending may be
set, so as to l imit the l iabil ity of the
procuring party. The letter may also define
the method of costing the work, ‘as actual or
proven costs’. Such a letter may be phrased
as follows:
‘Please take this letter as our intention to
enter info contract with you for the XXXwork. You are required to commencedesign work immediately, up to a valueof £LLL. In the event of no contract beingfinalised between us we undertaken topay all reasonable and proven costs
incurred.’
These conditions can vary considerably. For
instance they may state implicitly that terms
and conditions are to be agreed or thatthere is no intention to create legal or
contractual relations.
THE PROBLEM
In the event that the contract or sub-contract
is concluded shortly after the issue of theletter of intent, then there is unlikely to be
any resultant problem. However, where
there is a significant delay between the issue
of the letter of intent and the execution of the
contract or sub-contract the chances of a
successful conclusion become less and less
likely, since the contractor or sub-contractor
will feel able to obtain a more
advantageous bargain or better able to
resist pressures to accept unattractive
liabilities. Either party will only be deterred
from holding out if convinced that the
position is insecure without the backing of a
formal contract. However, i f a late
agreement is reached and a contract
signed, then there may arise issues as to theconditions under which the early work was
carried out.
It appears to be unusual for a contract is
terminated because the parties fail to agree.The normal situation is that work continues
under the letter of intent for the whole of the
works. Settling claims and disputes where
the terms and conditions are those of an
executed standard form of contract can be
difficult, but are as nothing to the potential
problems where no agreement has beenfinalised.
Finally, there is the matter of the rights of the
parties to terminate their involvement in the
project and the right of the other party to
damages if they do so.
3
Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.
WHEN IS THERE A CONTRACT UNDERA LETTER OF INTENT?
In the Court of Appeal judgement in MonkConstruction Ltd -v- Norwich Union Life
Assurance Society 62 BLR 107 Lord JusticeNeill reviewed the judgement of Mr Justice
G o f f i n B r i t i s h S t e e l C o r p o r a t i o n - v -Cleveland Bridge and summarises the result
of a letter of intent as giving rise to three
possible situations:There may be an ordinary executory
contract , under which each party
assumes reciprocal obligations to theother.
There may be what is sometimes calledan ‘if’ contract, ie a contract under whichA requests B to carry out a certainperformance and promises B that if hedoes so, he wi l l receive a certa in
p e r f o r m a n c e i n r e t u r n , u s u a l l y
remuneration for his performance.
No contract exists - ‘if, no contract wasentered into, then the performance of
work is not referable to any contract, the
terms of which can be ascertained andthe law simply imposes an obligation onthe party who made the request to pay a
reasonable sum for such work as hadbeen done pursuant to that request.’
This analysis is preceded by the observation:
‘As a matter of analysis a contract (ifany) which may come into existence
following a letter of intent.’
Since a letter of intent is in effect an offer to
a supplier to commence work ahead of a
contract being formalised, a letter of intent in
itself never establishes a contract. There
must be some form of acceptance by the
suppl ier for a contract to come into
existence.
This view is supported by other judgements
such as that in Mifflin Construction Ltd -v-Netto food Stores Ltd 1993 ORB 66.
‘In my view the true nature of the ‘letter of
intent’ was that it was an offer capable ofacceptance by the plaintiffs.’
In Hall & Tawse South Ltd and Ivory Gate Ltd
this was stated more forcibly:
‘A letter of intent is usually an unilateralassurance intended to have contractualeffect if acted upon, whereby reasonableexpenditure reasonably incurred inrel iance upon such a letter wil l be
reimbursed. Such a letter places noobligation on the recipient to act upon itand there is usually no obligation tocontinue with the work or to underfakeany defined parcel of work, the recipientbeing free to stop work at any time. Theeffect of such a letter is to promise
reasonable reimbursement if the recipientdoes act upon it’.
4
WHEN IS THERE AN ORDINARYEXECUTORY CONTRACT?
Where the supplier signs and returns the
letter of intent, or an attachment accepting
the letter then it must be certain that there is
a binding contract between them. In the
case of Ben Barrett & Son (Brickwork) Ltd -v-Henry Boot Management 1994 ORB 298
the defendant claimed that the letter of
intent, which was signed by the plaintiff,
constituted a contract between them. It was’
held:‘On the evidence, the Court found thatthere was clear evidence that the partiesintended to enter into a sub-contract andno evidence to support the contentionthat they did not intend there to be a subcontract until the main contract wassigned.’
However, if work carries on as requested by
the letter of intent then whether there is or is
not a contract will depend on the wording of
the letter.
A major factor in deciding whether the effect
of a letter of intent an acceptance, becomes
an enforceable contract will be the extentmatters still to be resolved are listed in the
letter. That the law does not recognise a
contract to negotiate, was decided in
Courtney & Fairbairn Ltd -v- Tolaini Brothers(Hotels) Ltd (1975) 2 BLR 97. In this case
there was a clause in the supposed contract
to ‘negotiate fair and reasonable contract
sums’. Inevitably the negotiations failed and
the builder sued for the cost of the building
work. Lord Denning commented:
‘If the law does not recognise a contract
to enter into a contract (when there is afundamental term yet to be agreed) itseems to me it cannot recognise a
contract to negotiate’.
While the existence of terms still to beagreed in a letter of intent leaves the parties
in a non-contractual situation, the situation
may well change as a result of further
agreement. In VHE Construction -v- AlfredMcAlpine Construction ORB 1995 No.
1114 the Judge found:
‘There are some eight items whichappear to need resolving, being:-
measured rates, clause on contractcharges, daywork rates, drainagearisings, vent trench arisings, discount,
programme, responsibility for damage tos e r v i c e s a n d t h e s o u r c e f o r t h eimportation of materials’.
Negotiations between the parties continued
in parallel with construction work and
eventually the final matter was agreed. It
was held that at this point a binding contracthad been concluded:
‘A sub-contract was completed by a
telephone call between Mr Brown andMr Brian Thomson in late February or
ear ly March when they agreed a
reduction in the period of payment,being the last issue to be resolvedbetween the parties and was further
agreed to by their conduct’.
In the case of Mitsui Babcock -v- John Brown(1996) CILL 1196 it is suggested that a
binding contract can be formed where there
are still matters to be agreed:
‘My review of the authorities leads me tothe conclusion that there is no reason in
principle why two parties should notenter into a binding agreement, if thatwas their intention, which is to beobjectively determined, even though they
have agreed that some proposed termsshould be the subject of further discussionand later agreement.’
The Judge went on to say:‘I do not consider that any binding
contract was concluded by JEB’s letter of
intent.’
The Judge does not suggest under what
circumstances a letter of intent, the subject of
further agreement, could be held to be a
binding agreement. In the event he finds
that there is a concluded contract in writing,
despite there being certain matters that
appear still to be agreed:‘In the light of the history of the dealingsbetween BEL and JBE leading up to thesigning of the contract documents, the
immediate circumstances surrounding thesigning and the fact that both- the parties
did sign the contract documents, I havecome to the conclusion that both partiesdid intend to conclude a bindingagreement when the contract documents
were signed.
There then follows a detailed argument as to
why an agreement as to the method of
test ing could be taken as reachingagreement on manufacturing tolerances.
If there are specified requirements laid down
in the main contract for the appointment of
sub-contractors, failure to follow these may
be a bar to a ‘works agreement’ coming into
effect. In Sir Robert McAlpine ManagementContractors Ltd -v- London Demolition (UK)Ltd 1990 ORB 1298 the judge was satisfied
that it was a condition precedent to an
enforceable contract that it should be under
seal. Further, the parties did not intend there
to be a contractual relationship until the
formal documents were executed.
Contract documentation, sent to a supplier
who is acting under a letter of intent, ifrejected on the grounds that it does not
represent an agreement between the parties,cannot be held to be evidence of a
concluded contract. In Kitsons insulation
Contractors Ltd -v- Balfour Beatty Buildings
Ltd (1991) 8 CLD 05-04:‘Balfour wrote to Kitsons, purporting to
accept the revised tender and enclosed
Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.
sub-contract documentation, which didnot reproduce the subcontract which had
been summarised in the earlier letter ofintent. It did, however, purport toinclude all the variations to the sub-c o n t r a c t w o r k s w h i c h h a d b e e nproposed since the date of the letter ofintent. Kitsons refused to undertake thesub-contract in that form, and no forma/sub-contract was ever executed by them’.
WHAT CONTRACT IS CONCLUDED BYTHE LETTER OF INTENT?
Where the parties have reached agreement
as to the terms of the contract they wish to
conclude and they sign an interim document
while the formal agreement is being
prepared, then the contract brought into
effect by the signing of the letter of intent
should reflect the intentions of the parties.
There may be one significant exception to
this. Where the intention is for the contractto be under seal, with the resulting 12 year
limitation period, it may be that until the
formal agreement is signed the contract isunder hand, with only a 6 year limitation
period.
Where agreement has been reached on
only some of the terms of the intended
contract, then great care must be taken withthe drafting of the letter of intent if the
benefits of the agreed terms are not to be
lost.
One option frequently employed is to couch
the letter of intent in general terms, such as:
‘In the event of the contract not beingfinalised, the contractor will be paid hiscosts’. When a letter such as this is written
the intention is to resolve the outstanding
matters and finalise the contract or for the
parties to part company. In practice the
frequent outcome is that the negotiations
make l i t t le progress and the work i s
constructed under the letter of intent.
In these circumstances the contractor may
find himself bound to an unintentional
contract which, had he realised the resulting
consequences, he would never have
accepted. In C J Sims Ltd -v- Shaftesbury Plc60 BLR 98, His Honour, Judge Newey QC
found that the letter of intent contained the
following statement:
‘In the unlikely event of the contract notproceeding, (the plaintiffs) wil l bereimbursed their reasonable costs whichhave been and will be incurred and costsfor which they are liable including thoseof their sub-contractors and suppliers,such costs to include loss of profit and
contributions to overheads, all of whichmust be substantiated in full to thereasonable satisfaction of our quantity
surveyor.’
In the event the contract was not concluded.
It was held that the contractor’s right to
payment for the completed work was not to
be based on his tender and the conditionshe had been required to tender against, as
would hove been the case if, as was
expected, the contract had been concluded.
Instead, the entire contract conditions werecontained in the brief words of the letter of
intent read in isolation from the tender andsubsequent negotiations and in a literal
manner. Although this case only concerned
the method and procedures of valuation
there is no reason to believe the same
situation could not arise with regard, to say,
programme.
The restrictions of such a letter of intent
would affect both parties. There would be
no place for a third party such as a contract
administrator or engineer. There will be no
entitlement to make variations, no due date
for completion and no liquedated and
ascertained damages.
I t should also be appreciated that
contractors f requent ly use the word
‘contract’ loosely to mean both the works or
project. In many letters of intent, such as in
Sims the intention may have been to allow
for a situation where Sims did not continue
with the construction work and was not to
relate to the contract in the legal sense.
It is important to distinguish the situation in
Sims where the letter of intent was for the
whole work to be subject of the contract,
f rom letters of intent request ing the
commencement of early activities, such OS
the ordering of materials.
LETTERS OF INTENT FOR INITIALWORKS ONLY
Where the procurement process is running
out of time it is common practice to request,under a letter of intent, the preferred
tenderer to commence his initial or advance
works. These may include a request to
prepare drawings, place on order items on
long delivery, reserve equipment of a
specialist nature and/or set up on site. The
letter of intent will set out the obligations of
the purchaser if the supplier responds to thisrequest. As described above if the supplier
responds by carrying out the work as
requested then a contract for that work andthat work only comes into being. The terms
of that contract are those as stated in the
letter of intent.
This arrangement should give rise to no
difficulties, if either a contract for the
c o n s t r u c t i o n w o r k s i s s u b s e q u e n t l y
concluded or the parties decide that they
cannot reach agreement after all and part
company. However, a not uncommonsituation is that no agreement for theconstruction work is concluded, but the
supplier continues beyond the work as
defined and contracted for in the letter of
intent.
In Monk Construction Ltd -v- Norwich Unionlife Assurance Society 62 BLR 107, this
s i tuat ion arose. The letter of intent
contained the following words:‘Our client has instructed us to confirmthat this letter is to be taken as authorityfor you to proceed with mobilisation andordering of materials up to a maximumexpenditure of £100,000.
In the event that our client should notconclude a contract with you, yourentitlement will be limited to the provencosts incurred by you in accordance with
the authority given by this letter’.
In the event no contract for the construction
work was concluded, but Monk completed
the building. Monk sought payment for the
work, but Norwich Union claimed that the
entitlement was limited to ‘proven costs’, asstated in the letter of intent. The Court of
Appeal upheld the judgement at firstinstance that the words of the letter of intent
were limited to the work done under its
authority and even then only if the supplier
did not proceed to carry out the construction
work.
Lord Justice Neil l made the following
comments in his judgement:
‘One then turns to the third and fourth
paragraphs of the letter of intent onwhich Norwich’s case on ‘proven costs’
principally rests.
It seems to me perfectly clear that thesetwo paragraphs were directed to aproblem which might arise if for somereason no contract for the execution ofthe Sub-Structure Phase II work was everconcluded between the parties.
The letter further provided that ifNorwich did not conclude a contractwith Monk, Monk could claim for the‘proven costs’ which they had incurred in
accordance with the authority given to
them to mobilise and to order a certainquantity of materials.
In my view the provision for the recoveryof ‘proven costs’ was intended to deal
with the situation if no contract wassigned and if no work on the Sub-
Structure Phase II project (apart frommobilisation and the ordering of somematerials) was carried out by Monk.
I agree with the Judge that the ‘provencosts’ formula was never intended toapply to the execution of the main
contract, nor was it intended to apply ifwork on the main contract began.
In my judgement the Judge was correctto conclude that Monk were entitled to
5
Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.
be remunerated on the basis of quantummeruit.’
LETTERS OF INTENT FOR THE WHOLEW O R K S
Because the letters of intent are intended tobe an interim measure, pending final
agreement they will rarely be issued for the
entire works. The case of Hall &, TawseSouth Ltd -v- Ivory Gate Ltd 1996 ORB No.
1612 was different in that it required the
contractor to ‘commence the works’. Theletter is quoted in full in the judgement but
significant parts are as follows:
‘We confirm that it is our intention toenter into a formal contract in the form of
the Standard form of Building Contract.
The condi t ions attaching to your
appointment are:
(a) That the form of the Bu i ld ing
Contract and escrow agreement are tobe agreed as soon as practicable.
‘ W e a r e n o w i n s t r u c t i n g y o u t ocommence the Works to be carried outunder the Building Contract, including the
ordering of materials necessary to theintent that you shall use your best
endeavours to achieve the contractprogramme and to act on all instructionsproperly issued under the terms of theBuilding Contract’.
It was held that:‘The Plaintiff had an option of whether to
start or not but, having started, thePlaintiff was under an obligation tocontinue with the works and not to stop,
unless the Defendant appointed anothercontractor or gave notice abandoning
the work, etc. envisaged by the letter’.
Although this was not an issue in the
judgement it appears that one of the factors
which made this letter of intent binding uponcommencing work was that it was for the
w h o l e o f t h e e n v i s a g e d w o r k a n d
subsequent instructions. This is compatiblewith the judgement in Monk.
WHEN ACCEPTANCE OF A LETTEROF INTENT DOES NOT CREATE ACONTRACTUAL OBLIGATION
It has been seen that, in general, it is
absence of disagreement that enables a
letter of intent if acted upon to be treated as
a binding contract. In the absence of any
further qualif ication, the resolution ofoutstanding matters wil l conclude the
contract. Th is was shown in VHE -v -
McAlpine.
While in many situations the parties will be
so close to agreement that the creation of a
6
binding contract at an early moment is their
aim, there will be many circumstances where
the intention is not to proceed into a formal
relationship and/or a commitment to the
project or its costs until certain special needs
are met or decisions are made. Such
circumstances may include the obtaining ofplanning or other approvals, the securing of
the necessary funds, the completion of
feasibility or other studies.
In Peter Lind & Co Ltd -v- Mersey Docks and
Harbour Board 2 L loyd’s Rep.234 thecontract could not be concluded until the
Board had approval under the Harbours
Act. The letter of intent merely stated:
‘Your tender was the lowest received bythe Board and it is their intention toaccept your tender when al l then e c e s s a r y f o r m a l i t i e s h a v e b e e ncompleted’.
By the time the defendants were able to
enter into contract, circumstances had
changed and the plaintiff sought to revise his
p r i c e . I t w a s h e l d n o c o n t r a c t w a sconcluded as the parties were sti l l ‘ in
negotiation on the question of price’.
One commonly used approach is to impose
a limit on expenditure under the letter of
intent. In Monk -v- Norwich Union, the letter
of intent said:
‘Proceed with mobilisation and orderingo f m a t e r i a l s u p t o a m a x i m u mexpenditure of £100,000'.
In the event they spent much more and were
held to be entitled to be paid on a quantum
meruit basis. In this case they had provided
a service well in excess of that described in
the letter of intent. It is possible that if a letter
of intent is, for say drawing work, and limits
the sum to be spent and only drawing work
is in fact done then the expenditure cap may
hold. If the reason for the expenditure cap
is given then it is suggested its effectiveness
is enhanced, under the second limb of
Hadley -v- Baxendale and the cop should
hold, at least until further work is done. Theexpenditure cap will probably be defeated if
the supplier makes it clear that the capped
sum has been expended and further work
continues with the full knowledge of the
purchaser.
An alternative method to restrict the
obligations of the parties resulting from the
acceptance of a letter of intent is to state that
it is not to create legal and/or contractual
relations. This is likely to be a more certain
method as the judgement in Comyn Ching -v-Radius Plc (1997) CILL 1243 suggests:
‘Very often, what is called a letter ofintent is properly construed as a bindingagreement, or as an offer capable ofacceptance. However, I do not soconstrue the letter of 25 November1998.
The correct approach when consideringthe effect of a letter of intent is to look forthe purpose of construing it at the
document itself, at the surroundingcircumstances, and of what happenedwhen it was brought into existence. Thefact that it has the particular label that ithas does not brand it as the outset as acontractual document or as a ‘non-contractual’.
To begin with, the letter of 25 November
is headed ‘Subject to Contract’. In thisinstance, I believe that those words were
intended to mean what they say, and the
parties had no reason to think otherwise’.
The decision of the Judge to look at ‘the
document i t se l f , at the sur roundingcircumstances, and at what happened when
it was brought into existence’ shows a very
different approach to that used whenconstruing a contract. This is very obvious
in Sims -v- Shaftesbury where it was common
ground that:
‘The Defendant’s letter of intent followedby the Plaintiffs commencemenf of work
on site gave rise to a contract between
them’.
Since the judgement was for a sum of money
under Order 14, the Judge did not consider
whether a contract existed, but ruled on the
strict words of the letter of intent.
The judgement in Fraser Williams [Southern)
Ltd -v- Prudential Holborn Ltd (1994) 64 BLR1 gives full details on the use of the phrase
‘subject to contract’, where it was held,
allowing the appellants’ appeal:
‘(1) In order to determine whether acontract had been concluded, it wasnecessary to examine the course of
dealing between the parties, bearing inmind that the phrase ‘subject to contract’
was normally used to prevent a partyf rom being contractual ly bound.However, when used by experiencedbusinessmen, ‘subject to contract’ isn o r m a l l y t a k e n a s m e a n i n g t h a tacceptance must be in writing. On thatbasis, the proposal was not an offercapable of being accepted.
(2) The letter of 10 March amounted tono more than on acceptance that theparties should go a stage further. The
parties’ behaviour indicated that theyboth expected a formal contract to beagreed.
(3) The reason for the letter of 5 Aprilwas that both parties considered that it
was time to put into place the contract towhich the proposal of 3 March wassubject , but , s ince there was no
acceptance, there was no concludedagreement’.
When a purchaser under a letter of intent is
Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.
claiming that the acceptance of the letter of
intent constituted a contract under the termsof a certa in s tandard form and i t i s
demonstrated that he did not implement the
procedures of that form of contract then it is
likely that the supposed contract will befound not to exist. In Alldridge (Builders) Ltd
-v- Grantactual (1995) CILL 1225 it was
found:
‘Mr Eastwick himself agreed in cross-
examination that the parties did not in
f a c t a d m i n i s t e r t h e c o n t r a c t i naccordonce with the provisions of IFC84. He agreed that ‘an FC 84 letter ofnotice’ was nowhere to be found, andthat ‘the contract was never fullyoperated to the letter of the law which isset out in IFC 84’. In paragraph 52 ofhis witness statement, Mr Davis identified
numerous provisions in the amendedfrom of IFC 84 which the defendantasserts was intended to apply and whichMr Davis says were not operated. This
evidence is not challenged.
I n m y j u d g e m e n t , t h e r e f o r e , t h edefendant’s ‘fall back’ position cannot be
sustained either, and the terms of IFC 84were not incorporated info the contractbetween the parties’.
THE INCORPORATION OF EARLYINSTRUCTIONS
Unless otherwise agreed, instructions and
variations given before the contract is
concluded and which would be allowable
under the contract once concluded, will
become instructions or variations under thecontract.
In Trollope & Colls Ltd and Holland &Hannen and Cubitts Ltd -v- Atomic PowerConstructions Ltd 3AII ER 1962 1035 MrJustice Megaw had to decide whether the
works done by the plaintiff between the
receipt of a letter of intent in January 1959and the signing of a contract in April 1960
w e r e d o n e u n d e r t h e t e r m s o f t h a t
agreement. The plaintiff sought payment for
that work on a quantum meruit basis. Mr
Justice Megaw saw no difficulty in the effect
of a contract being retrospective:
‘So far as I am aware, there is no
principle of English law which provides
t h a t a c o n t r a c t c a n n o t i n a n ycircumstances have retrospective effect,or that, if it purports to have, in fact,retrospective effect, it is in law a nullity’.
The reason the plaintiff challenged the
validity of the contract signed in April wasthe effect of the large number of variations
that had been carried out between the letterof intent and the contract’s execution. These
variations were not incorporated into thecontract, which reflected the original design
intent. Mr Justice Megaw stated that four
propositions needed to be considered as to
whether the contract was binding:
‘(1) there must have been an intentionby both parties continuing up to April1960, to make a contract;
(2j at that date the parties must havebeen ad idem on all the terms which theythen regarded as being required in order
that a contract should come intoexistence;
(3) the terms on which the parties weread idem must not omit any term which,even though the parties did not realise it,was in fact essential to be agreed inorder to make the contract commercially; and
(4) there must be some manifestationwhich indicated with sufficient clarityacceptance by the offeree of the offer asthen made, such acceptance complyingwith any stipulation in the offer itself asto the manner of acceptance.’
He only found 1, 2 & 4 to be satisfied.
Proposition 3 was satisfied if the terms of the
contract could act retrospectively.‘He accordingly held that a contractcame into existence between the partieson 11 April 1960, for the carrying outby the plaintiffs of the civil engineering
work for the power station, substantiallyon the terms set out by the defendants intheir points of defence, and that the
contract had retrospective effect togovern the relationship of the partiesfrom the inception of the work’.
SPECIAL CASES
The general rule is that a letter of intentplaces on the purchaser the obligation to
pay the supplier for any work or servicedone in response to the issue of a letter of
intent. This may not be true where the letter
of intent states that a specific course of
action is to be taken, such as the enteringinto a subcontract with a third party.
In Mifflin Construction Ltd -v- Netto Food
Stores Ltd 1993 ORB 66 the specialist
contractor Mifflin had been issued a letter of
intent for structural steelwork. In this case
the intent ion was that Mi f f l in would
eventually become a sub-contractor of the
main contractor yet to be appointed.
Budge were appointed as main contractors
and the necessary instructions were issuedby the contract administrator, on behalf of
the employer. Despite meeting with Budgeand agreeing outstanding matters, such as
the programme of the works, Mifflin never
concluded a sub-contract with Budge.
In settlement of their account Budge sent
Mifflin a cheque which was dishonoured
and Budge went into liquidation. Mifflin
then sought their money from the employer.
It was held that Mifflin were in breach of
contract in not having concluded a sub-
contract with Budge and could therefore not
recover their money as a consequence. Itwas held:
‘The fact remains that the forms werenever completed and that the condition
of a sub-contract in form NAM/T Section
III, which was to discharge the contract
based on the letter of intent, wastherefore never fulfilled.
However, although there was a failure ofthe condition which was to discharge thecontract based on the letter of intent, thatfailure was itself, on the facts I have
found, a breach by the plaintiffs of theirobligation under that contract toconclude a sub-contract with Budge bycomplet ing Sect ion I I I of NAM/J.Clearly, the damages for that breach arethe sums for which the defendants areliable to the plaintiffs under the letter ofintent’
Where o letter of intent is phrased so as to
be a clear intention not to formulate a
binding contract, then that clear intent will
not be destroyed by subsequent actions,other than the formation of such a contract.
The payment of money, for example, even if
prior to any performance by the supplier,
will not change an informal arrangement
into a binding contract.
In Comyn Ching -v- Radius Plc {1997) CILL1243 it was held:
‘It is said that when Mr Dixon on behalf
of the defendants accepted a cheque for£15,000 from Mr Culverhouse togetherwith the letter of intent, he thereby
entered into a contract on the terms ofthe letter of intent. I do not accept that.By accepting a cheque for £15,000, thedefendants plainly entered into acontract to do certain work ordered bySWEL, and they also followed normalcommercial practice to ‘get some moneyup front’ for the work they were carrying
out. But I hold that they did not enterinto any further legal obligation’.
One of the most commonly quoted cases, in
connection with letters of intent is TurriffConstruction Ltd -v- Regalia Knitting Mills Ltd
9 B L R 2 0 . T h a t t h i s s h o u l d b e s o i ssurprising since in’ this case the letter of
intent does not conform to the description ofLord Justice Neil in Monk -v- Norwich Unionof on ‘if’ contract being where:
‘A requests B to carry out a certainperformance and promises B that, if hedoes so, he wil l receive a certainp e r f o r m a n c e i n r e t u r n , u s u a l l yremuneration for his performance’.
Turriff -v- Regalia can be regarded as a
special case in that the supplier requested
the letter of intent in the following words,
7
Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.
which were recorded in minutes of a
meeting with Regalia:'TTS requested on early letter of intentfrom the client to cover Turriff Ltd for the
intensive design work now commencingand for the essential orders on sub-
contractors necessary to meet a 38 weekphase one programme commencingearly August The client confirmed that
his letter of intent would be forwarded tous as soon as possible’.
Effectively this was an offer to do work for
payment which would be regarded asaccepted on receipt of a letter of intent.
Such a letter of intent was provided in the
following words:
‘Dear Sirs, As agreed at our meeting of2 June I969 it is the intention of Regaliato award a contract to Turriff to build afactory including production, stores,
offices and canteen facilities to be built infour continuous phases.
Phase I to be on a fixed price basis asagreed and phases II, III and IV to becalculated on the same basis as Phase Ia n d c o m p l e t e d b y 1 9 7 2 . T h ecommencing date to be 1 August and theterms of payment to be negotiated on a
monthly form against bills of quantitysupplied by Regalia’s surveyor.
Al l this to be subject to obtainingagreement on the land, and leases with
the Corby Development Corporation, full
building and bye-law consent, and thesite investigation being undertaken byDrilling and Prospecting International Ltd.
The whole to be subject to agreement onan acceptable contract.’
Despite Regalia not expressly undertaking to
pay for work done in advance Mr Justice
Fay found:
‘The defendants made known to theplaintiffs that they required an indemnity
in respect of work done between themand the execution of the contract. I amsatisfied that he understood that theywanted an assurance that they would be
paid even though the contracts were notexecuted.
The letter of intent was given.
The letter of intent was accepted assatisfying the request’.
and the Judge held:
‘They (the plaintiffs) indicated that theywould regard receipt of a letter of intent
as an acceptance of their offer. On 17
June the letter of intent was sent. Unlesst h e t e r m s o f t h a t l e t t e r n e g a t e d
acceptance of the offer, upon its receiptthe offer was accepted and the ancillarycontracts came into existence’.
8
SUMMARY
(1) Letters of intent do not normally create a
contractual obligation, but are more often an
offer open for acceptance.
(2) Accepting the letter of intent may not
effect a contract on the terms of a tender as
submitted for the work and subsequent
negotiations.
(3) Often the letter of intent will identify
matters to be agreed, or declare it to subject
to contract. Such a letter of intent if acted
upon will only become a binding contract
once all outstanding matters are agreed or aformal contract executed, the effects of
which will normally be retrospective.
(4) A letter of intent may limit the work to be
done. Where further work is performed at
the behest of the purchaser and no formal
contract comes into being, the supplier is to
perform in a reasonable time and be paid
on a quantum meruit basis.
CONCLUSIONS
What are the effects of a letter of intent? In
return for any early commencement of work
the purchaser will if negotiations are not
concluded, lose much of the strength of his
negotiating position, a situation which will
worsen with time.
If no contract is concluded the supplier’s
position at law at any rate is very strong.
He has to perform only in a reasonable time
and is entitled to a quantum meruit, often
considered to be cost plus profit or better.
As Lord Justice Neill quoting from Goff Jsays:
‘It would be an extraordinary result if, byacting on the buyer’s request in such
circumstances, the seller were to assume
an unlimited l iabil ity for continualperformance, when he would never
assume such liability under any contractwhich he entered into’.
It must be questioned as to how many
purchasers, keen for their projects to get
under way, rush into a letter of intent
appointment, nor realising that in doing so
they may be throwing away all the thought
a n d c a r e t h e y b e l i e v e d t h e y h a d
incorporated into thei r contractual
arrangements?
Finally, paraphrasing a comment in S NBall’s article in The law Quarterly Review,
where letters of intent are concerned the
concept of caveat emptor is very much alive
and kicking.
ORB Official Referees Business
BLR Building Law Reports
ClLL Construction Industry Law
Letter
CLD Construction Law Digest
Lloyds Rep Lloyds Law Reports
ALLER All England Law Reports
Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.