Construction projects are technical in nature and are often hugely complex. The contract needs to reflect this complexity and will involve some negotiation even where a standard form contract is to be used.

Contractors are reluctant to commit resources to a project in the absence of a formal agreement guaranteeing payment and clients need to get their projects moving. Letters of Intent are often used as a device to try and meet these requirements. Reality bites when these end up being the only paper work for the project and the parties fall out.

The Courts have consistently cautioned against starting work on a construction contract without having a contract in place. When presented with a Letter of Intent one of the first things they will consider is whether it is legally binding. As a general rule, agreements to negotiate or agree further items are unenforceable. If it is expressed as non-binding this will generally be upheld by the courts. However, a mere statement that it is binding and enforceable does not automatically make it so.

To be enforceable, it must include objective criteria by reference to which agreement would be reached on outstanding matters. An illustrative case is the High Court decision in Dhanani v Crasnianski [2011]2 All E.R.799 which involved the setting-up of a private equity fund. Key terms were agreed in a term sheet and at the same time a Letter of Intent was signed. The parties created a timetable for agreeing the remaining terms covering the exact structure, form and location of the entities forming the fund. However the Letter provided that each party had further work to do in finalising those terms. The court held that while there was some certainty, sufficient matters remained to be agreed so that the Letter of Intent coupled with the term sheet were considered to be an agreement to agree and therefore unenforceable.

Letters of Intent can in some cases form contracts. In Diamond Build Ltd v Clapham Park Homes [2008] EWHC1439 (TCC) the court held that the inclusion of key terms in the Letter including commencement and completion dates, a requirement to proceed regularly and diligently, the overall contract sum and an undertaking to pay reasonable costs in the interim, created sufficient certainty to give rise to a simple contractual arrangement. Even though the Letter set out the intention to enter into a specific JCT contract, there was no stipulation in the Letter that a contract would only come into existence if a formal contract was concluded, so a contract on the terms of the Letter was deemed to exist.

Letters of Intent often provide a financial or time limit to limit the client’s exposure and provide some financial comfort for the contractor. Where a financial cap is stated in a Letter of Intent, this will normally be upheld by the court. In Mowlem plc v Stena Line Ports Limited [2004] EWHC 2206 (TCC), the contractor`s entitlement to payment for works carried out was held to be subject to the limit stated in the Letter of £10 million. The court held that no term would be implied that the contractor was to be paid a reasonable amount for work carried out beyond the expiry date of the Letter. Similarly, in Diamond Build, the contractor unsuccessfully argued that a £250,000 cap in the Letter of Intent was not enforceable.

Clients will often seek the advice of their consultants on risk and how best to get a construction project moving. The High Court has recently considered two contrasting cases where consultants have advised in connection with Letters of Intent. In Cunningham and Good v Collett & Farmer [2006] EWHC 1771 TCC, the claimants sued their architects for breach of contract where a Letter of Intent had been entered into but ultimately no formal building contract was executed. The court held that the architect was not negligent in advising on commencement of work under the Letter of Intent. It said that a letter of intent can be appropriate where the key terms and conditions are stated in the letter and in this case it met the client’s requirements to get started with the works ahead of contract finalisation. The court also found that the client had entered into the Letter of Intent on the basis of its own analysis of the risks and had been responsible for the delays which ultimately resulted in the contract not being entered into.

However, in The Trustees of Ampleforth Abbey Trust Turner & Townsend Project Management Limited (2012) EWHC 2137 (TCC) the project manager for the Trust was held to have failed to exert sufficient pressure on the contractor to execute the building contract. The Letters of Intent in that case proved to be less favourable than the intended formal contract in particular as they did not contain liquidated damages provisions whereas the intended contract did. The consultant had failed to exercise reasonable skill and care in ensuring the execution of a formal building contract and had not fully advised the client of the potential implications and risks of proceeding under the Letters of Intent.

Conclusion

Letters of Intent if well drafted can be useful if the risks are assessed and explained to clients on a project specific basis. Every effort should however be made towards finalising and entering into the contract as soon as possible to minimise misunderstandings and disputes.