Is Your Letter of Intent a Contract?

There are five essentials for a contract:

  1. offer
  2. acceptance
  3. intention to create a contract
  4. consideration (the price or a promise) and
  5. certain & complete terms.

A random bundle of letters will rarely be enough for a contract (the image is from Yorkshire Sculpture Park).

Whether your letter of intent meets all those requirements is a matter of fact to be determined by a court.

Was it intended?

Although letters of intent are at their best when used sparingly and wisely, in Merit v Balfour Beatty the third, and last, sub-contract works package was started under a letter of intent. The scope of the letter of intent was extended until works exceeding £1.5m were to be carried out.

Q1: If the letter of intent is marked ‘subject to contract’ does that mean there was no ‘intention to create legal relations’ until the main contract had been finalised?

A1: Not necessarily… read more.

Was there certainty?

Q2: Did the letter of intent contain enough certainty for the court to enforce it?

A2: No. The biggest sticking point was that they never agreed a price. The judge said:

“I cannot see how [the difference in price of some £40,000] can be regarded as either de minimis or otherwise non-essential… it might be open to a party to argue that a disagreement about the final contract price might not be a bar to a finding that the parties had concluded a contract if there was a machinery, independent of the parties, by which the price could be fixed… It is well established that the parties may commit themselves to binding legal relations even though there are further terms still be to be agreed or some further formalities to be fulfilled [but] the most important the term is the less likely it is that the parties would have left if for future decision. One would have thought that on almost any view the contract price is likely to be an important term in a contract such as this.”

As the parties had not agreed terms which were certain and complete, the court said there was no contract.

What should you do?

Employer: If your letter of intent does not have enough detail (especially on works, price and time) then you may have to pay for all works carried out. BUT without a contract you have no remedies for defects, delay or other defaults.

Contractor: Even if you don’t sign the letter of intent, once you start those works you have accepted it by your conduct. You are likely to get paid for any works carried out (contract or none) based on a ‘reasonable sum’.

Case: Merit Process Engineering Ltd v Balfour Beatty Engineering Services (HY) Ltd [2012] EWHC 1376 (TCC)

 

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