I have been re-reading Letters of Intent: Avoiding the Old Mistakes, Again.* It is full of great quotes about letters of intent including this finding:
there is a great deal of conflicting guidance on content with very little guidance … very few lessons had been learned from the high profile cases
When I ask audiences, I find there are three common approaches to letters of intent:
- Follow the guidance from eg the RICS, CIOB and APM and avoid letters of intent at all costs (we could call this the ostrich strategy)
- Recycle old documents and keep your fingers crossed that the content and the parties’ conduct does not result in a dispute (the hope strategy)
- Create simple and effective letters of intent that are quickly superseded by a full contract document (the success strategy).
I want to explore these options objectively.
The Ostrich Strategy
This strategy is not always in the client’s best interests. You are basically holding the client to ransom unless you change the programme to reflect the delays in agreeing the contract. Ideally you combine this with a roundtable completion meeting to minimise the time for further negotiations. It is not negligent (according to the courts) to use a letter of intent, so why are you deciding it is not even an option to consider? Although there are risks associated with letters of intent, and lessons to be learnt from the high profile cases, none of these are insurmountable.
The Hope Strategy
My experience is that the majority of letter of intent users fall into category 2. But hope is not a strategy.
Recycling letters when you have no idea whether they are ‘good to go’ or a ‘disaster waiting to happen’ is foolhardy at best and negligent at worst. If you’d like to check if your letter of intent is good to go then download my free checklist and rate your current version.
The Success Strategy
As David Chappell says (in his book Construction Contracts Q&A, 2011)
it is difficult to think of any other cause responsible for more difficulties and disputes in construction contracts than the employer being in a hurry
Using a simple temporary contract which is not linked to the main contract will maintain momentum on negotiating the full contract, while allowing limited services or works to start. What’s not to like? Success in this strategy requires simple content that reflects the needs of the project, used properly, and quickly followed up with the full contract.
Why simple? If your letter of intent is too long then you may as well just agree a standard form contract like JCT Minor Works. If it needs to be created, negotiated and signed in a hurry then it needs to be simple.
Why properly used? If you allow a letter of intent to be extended and rumble on then you have misunderstood its temporary nature. The court has said that if you are prepared to send a letter of intent then you should be prepared to terminate the contractor’s employment if they don’t sign.But as the Bailey paper says “it would be completely counter-productive to remove an incumbent contractor who has commenced what were considered critical works.” The client is left between a rock and a hard place!
Ideally your letter of intent should come to a swift end (through performance of a limited scope of works) to maintain the incentive on the contractor to sign the full contract.
Why superseded? If you fail to get the full contract signed, then you are treating that contract as a dispensable luxury (which it is not) and forgetting the skeletal nature of the letter of intent (despite its length).
Of course, there are other contractual mechanisms which might prove easier to implement such as a two-stage tender, or (if that’s too late) a pre-construction services agreement, or even an order for specific goods and works. There are other practical steps too like changing the contract programme to meet the reality of agreeing the contract first.
Although some of these may seem unpalatable, they are all a great deal better than using hope as your strategy.
*This is an unpublished masters dissertation by Russell Bailey of Faithful+Gould on letters of intent that I have referred to in my SCL paper D-195 and my book.