Letter of intent

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I disagree with the content for your proposed letter of intent. It muddies:

• mini-contract for preparatory works
• heads of terms for proposed full contract
• fall-back position in case the full contract is not signed and the works continue

In reality the courts have said (eg Hart v Fidler) that you only need four essentials for a letter of intent and those should relate to the preparatory works and not the project.

The risk is that the letter is never terminated, the full contract is not signed and nobody knows what terms, procedures and remedies apply to the works carried out.

I have some sympathy with this view but do not entirely agree.

The article makes it clear LOI’s are not a substitute for a contract and cannot be made into an agreement to agree. The reason for their existence is the tedious process of getting legal documents of substance first of all agreed, then authorised by the appropriate personnel and then signed. The contract also includes the documents used for tendering and post tender negotiation material. It literally can take months during which frustrated project management on both client and contracting sides committed to deadlines want to get on with the project. So LOI’s are an imperfect expedient to buy time which will always attract criticism from the legal profession.

Hart V Fidler in essence was focusing on the status of an adjudicator rather than the adequacy of a LOI. The LOI in question limited the work to a value of £20,000 thereby placing a limitation on scope. A second letter, extending the validity of the letter two weeks beyond the initial backstop date for substituting a signed contract for the LOI, lifted the maximum value cap without defining the scope of work. The judge observed that price, programme and scope were essentials to a building agreement and in the circumstances the scope should have been properly defined. The reason for inserting the type of contract proposed is to prevent the parties trying to re-negotiate standard terms or change the contract to be used thereby lessening opportunity for prevarication and delay to signing. It is not so its standard clauses can be invoked in the event it does not get signed. The Ampleforth case is a stark warning to those happy rely on an LOI in lieu of a proper contract.

An LOI is merely a framework and temporary agreement. As such it outlines the work, the standard contract to be used in substitution and sets out reimbursement until such time the contract is signed.

A mini contract for preparatory works is a OK for demolition, site preparation in redevelopment but has less use in fast fit out projects. Furthermore it does not obviate the delay in getting the legals and accompanying documents sorted in time to match the project start date.

Putting the items listed in the article in a LOI is important to prevent misunderstanding.

Letters of intent, as the comments note, are definitely an imperfect expedient or contractual "half -way house" (Mosey's words). It should always be treated as a temporary contract for pre-contract works and services, which should be clearly identified and not left open to interpretation.

However, the cases have shown that the more content the letter of intent contains, the harder it is for (a) the partners to understand what its purpose is and what it means for them (b) the lawyers to advise on the same (c) the administrators to implement the terms and (d) the courts to decipher when there is a dispute.

Heads of terms, ie what has been agreed (standard form, works documents) and what still needs should be set out in a separate schedule or document. As stated, this prevents the partners re-negotiating what has already been agreed. But by separating the content it avoids the risk of the letter of intent accepting the contractor's tender and prevents arguments like those in Twintec v Volkerfitzpatrick about which terms in the main contract apply to the letter of intent works.

The limits in letters of intent have largely (except in two cases) been found to be ineffective in limiting the employer's liability for works carried out by the contractor. Any employer who believes they will not have to pay for works carried out beyond the scope of the letter of intent is mistaken.

Although letters of intent are used globally, recent research has shown that the partners, courts and lawyers do not fully understand them. The only safe route is a clear contract for small scale works which is rapidly followed by a full contract for the project. This will help the partners achieve the project objectives and avoid disputes.

The problems that cause delay to contract signing are:

1. Agreement as to what contract documents are to accompany the contract.
2. Written clarification to verbal negotiations that took place after receipt of tenders which often needs the support of subcontractors prior to main contractor agreement.
3. Higher authority and in-house or external lawyers sign off by both parties to the contract.
4. Resolution of tender qualifications inserted in the contractor's tender.
5. A tendency to try and include any amendments to the scope that have occurred between the issue of tender information and the current start on site. The perceived advantage to the client is that such amendments are priced when there remains some negotiating leverage.
6. The logistics of printing and counter signing sets of a very large batch of documents.

This can take easily three months to sort out on a large project. It is rare for contract conditions already provided with tender information to be the cause of delay or dispute. I am not sure how agreeing Heads of Terms assists any of the above problems. Three months can take the project well beyond preparatory or small scale works. Foundation and drainage works may be undertaken and it would be unwise to split liability for this under a separate contract.

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