Although there are a number of pitfalls with letters of intent, the key risk is that the full contract is never signed.
A letter of intent is used to get the project started quickly, but it is only intended to be a temporary stop-gap. So why don’t the parties get the full contract signed?
Why Do the Parties Forget to Sign?
There are a number of reasons why the full contract may not get signed:
- Wrong assumptions: The client and the contractor may (wrongly) assume that a letter of intent is the last stage in the contract negotiation process and decide that nothing more needs to be done to neatly tie off the contractual ends… A letter of intent is only the start of the contract negotiation process, not the end. They take their ‘eye off the ball’ and forget about the importance of ensuring that the fill 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 (CC).
- Priorities: The client and the contractor decide that negotiating the full contract is not very important and can wait. There is a perception that getting on with the works is more important than the dry legal documentation (JB).
- Letter is Good Enough: The client and the contractor may (wrongly) assume that since the letter of intent refers to or incorporates all the provisions of the full contract, it is therefore as good as the full contract. BUT, at the time the letter of intent is sent, there will be aspects of the full contract that have not been agreed – otherwise the parties would sign that contract instead.
- Distractions: The client and the contractor may get distracted by providing the works, goods and services to get the project started quickly. There is too much to else to do at the point of start on site (DM).
- Perceived Advantage: The client may think it is getting an advantage as it hasn’t had to negotiate the full contract but the works have already begun. The client could not be more wrong… See what happens when letters of intent go wrong – the client perspective for more on the impact for the client.
- Blank Cheque: The contractor may think it has a blank cheque to carry out all and any works on the project, without having to worry about additional procedures and policies. The contractor is also wrong as without a contract, the client can ask the contractor to stop work on the project.
- Brinkmanship: The client and the contractor simply cannot agree the details and each refuses to compromise believing itself to be in the strongest position creating on-going negotiations and brinkmanship on matters of detail (DM).
- Laziness: The client fails to exercise its right to terminate the contractor’s engagement under the letter of intent (RG) and the contractor considers it is better off continuing under the letter of intent, so the project just rumbles on… and on.
In my view a letter of intent is a bit like a firewalk – if you keep going and get to the other side (ie sign the full contract) then you are generally ok. If you stop or slow down then you will get burnt. See this video for my explanation.
* Notes: CC=Cunningham v Collett & Farmer (2012). RG=Robertson Group (Construction) Ltd v (1) Amey Miller (Edinburgh) Joint Venture and Others . Quotes from Society of Construction Law papers D117 and 171 by Jon Bowling (JB) and David Mosey (DM) respectively. Available from the Society of Construction Law website.