A letter of intent is a specialised form of short form contract in the style of a letter. It is widely used in the UK construction sector to get a project started with the minimum of paperwork.
Most letters of intent include a variety of elements:
- a request to provide some goods, works or services (rarely defined with precision)
- the current state of negotiations on the ‘proper’ contract for the full scope
- references to terms and other documents which will be included in the ‘proper’ contract
- a fall-back position if the ‘proper’ contract is never signed.
This post considers the role of the ‘proper’ contract and whether the legal terms intended for that contract form part of the letter of intent and whether those terms bind the parties pending the execution of that ‘proper’ contract.
The case law
I have chosen three cases to illustrate the issues and give some examples of the court’s reasoning.
Letter 1 (Twintec)
It is our intention to award you the Warehouse Slab works for all services as detailed within the documents listed below and attached, for the above project, but we are not yet in a position to enter into this Sub-contract.
Subject to the terms of this letter, we authorise and request you to proceed immediately with all works necessary to enable you to achieve the Design Programme and Construction Programme in accordance with the documents below.
It was the reference to the documents below that was relied on to bring in the relevant standard form terms as part of the letter of intent.
Decision 1 (Twintec)
The court recognised that ‘it was necessary for [the subcontractor] to carry out the work in such a manner that it would not put itself in breach of any of the terms in the standard form of sub-contract once it had been entered into’. This makes sense as the ‘proper’ subcontract will apply retrospectively to cover all the work under the letter of intent as well as that carried out once the subcontract is signed.
But the court went on to say ‘But I do not consider that it can be said that dictates of business efficacy require a term to be implied that [the subcontractor] would comply with every term of the [standard form of subcontract’s] conditions.’
The court refused to incorporate all of the terms of the ‘proper’ contract into the letter of intent.
Letter 2 (Spartafield)
…we write to confirm that it is our intention to enter into a contract with yourselves for the above works. This “Letter of Intent” authorises the works as detailed within [specific cost plan] for the sum of £1,000,000 excluding VAT…
Subject to you countersigning and returning this letter, meeting the conditions both set out above and contained in your tender and in the event that a formally executed contract does not come into existence between us then I also agree to reimburse you for any costs due to third parties provided that such costs are substantiated.
It was the reference to the conditions set out above and contained in your tender that was relied on to bring in the relevant standard form terms as part of the letter of intent.
Decision 2 (Spartafield)
The court was somewhat scathing about the letter of intent’s poor drafting: ‘…it is an odd document. It appears to be a patchwork of individually familiar provisions that, in combination, do not always sit easily with one another.’ None of this is news to those of us who have reviewed hundreds of examples and rarely found one that makes much sense as a temporary short form contract.
But the court decided that in this case ‘in respect of any work undertaken by [the contractor] the JCT ICD terms of contract were applicable pending any other finalised agreement to the contrary… subject to any express term in the letter of intent.’
The court said the terms did apply.
Letter 3 (OD v Oak)
We confirm it is our intention to enter into a contract based on a standard form. This information [works documents] will be incorporated into any order with us. This letter of intent is based on your knowledge and acceptance of the [standard form] contract stated.
It was the reference to based on a standard form and acceptance of that standard form that was relied on to bring in the relevant standard form terms as part of the letter of intent.
Decision 3 (OD v Oak)
The court said that whilst it made sense for the works documents to be agreed at this point, it ‘does not mean that…the [standard form’s] terms were incorporated. It is one thing to agree what particular you will have if you execute [the standard form]; it is quite another to say that you have, therefore, incorporated all those [standard form] terms and conditions at the outset.’
The second sentence, the court decided, merely meant that the contractor was agreeing in advance the standard form that would apply.
‘…the LOI contemplated only two possibilities. Either it applied by itself and on its own, with the provision for payment and relevant particular terms contained within it or a JCT contract is actually executed and signed with all the particulars filled in. There is, in my judgement, no third way, i.e. that in the meantime there is an adoption of the JCT terms. Neither the language nor the context of the LOI provides for that and nor it is, in any way necessary…’
It is impossible to draw any categorical conclusions from these cases. But my view is that the approach in decisions 1 and 3 are more likely to be followed in future decisions.
What should you do?
If you intend your relationship to be governed by specific terms, then make every effort to get those agreed before you start work.
If not, the court may be persuaded that they apply because you made a passing reference to them in another document like a letter of intent, but it may not. It’s a risk!
Sources: Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10; Spartafield Ltd v Penten Group Ltd [2016] EWHC 2295; OD Developments v Oak Dry Lining Ltd [2020] EWHC 2854
