Last edited 16 Oct 2017

Should You Do Preparatory Works Before Agreeing to a Final Contract?

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See also Letter of intent.

Contents

Introduction

It’s not unusual for a contractor to implement preparatory works before the final agreement of a contract with an employer. This is usually done in order to ensure a good start of the professional relationship with the client. There are, however, rare instances that between the time that the contractor begins working on the site and the drawing up of the contract, the employer decides to call off the work.

This means that the contractor takes on the losses they did for doing the preparatory work. In this kind of case, the contractor will, of course, claim the initial investment, but the usual result is the client denying liability for it.

What do you do as the contractor?

In circumstances where the project is classified as ‘subject to contract’ or done on ‘express terms,’ the costs for doing the work are at risk. Any time that either of the party backs out, neither will be able to recover the costs that have already been spent.

Nevertheless, there are clauses for cases where both the parties have agreed on forming a contract but the client has issued an order to start the project even before a contract was made. The courts can actually order the client to pay the contractor as long as there’s proof of the client advising the contractor to start work even before the actual drawing up of the contract.

If this is applicable to you as a contractor, you should get a letter of intent (LOI) outlining the client’s intention to get enter into a contractual agreement with you. This letter should include relevant details of the work done for the client as well as how they made their request to start preparatory work before entering an actual contractual agreement.

With this in mind, the letter of intent’s purpose is threefold: as an interim contract with its own terms, as a non-contractual document, and as a form of final contract if ever there’s no formal contract agreed on to replace it.

There is legal precedent. For example, in the case of OTM Limited v Hydranautics (1981). OTM limited confirmed their intent, specifically stating “it is our intention to place an order for one chain tensioner. A purchase order will be prepared in the near future but you are directed to proceed with the tensioner fabrication on the basis of this telex”. Which was upheld in favour of the contractor.

However, another case, Ampleforth Abbey Trust v Turner & Townsend is an example of the limitations of a LOI. This case required legal resolution when work was started upon receipt of letter of intent from the client, but after 4 months, the client, Ampleforth, sued for professional negligence believing that the deadline had passed, for work to be completed. even with no contract signed.

The court awarded damages to the client, because the letter of intent failed to clarify attainted and clarified damages. The letter of intent was recognised but showed its limitations.

These components are as follows: the equivalent fees of the work done, the key terms of what has been requested, as well as their intention to go into a legal binding contract with you. If the final assessment is that there has been some sort of contract formed between the two parties then the contractor will likely receive a just payment for the works they’ve rendered so far.

Liabilities Under the Different Types of Letters of Intent

In this section, we’ll further discuss the liabilities under the different types of letters of intent.

Non-contractual

As the contractor, if you carry out any work under this type of LOI then you’ll be paid on the basis of ‘quantum meirut.’ This just means that the maximum pay you can expect for what you’ve accomplished so far is likely reasonable. You or the client can stop the work at any point during the duration of the project. However, most courts don’t usually classify LOIs in this category since the more common purpose is to attempt to form a contractual agreement.

Interim contract

If both parties have entered into an interim contract, it should be identified first whether the temporary one has been succeeded by a full, complete contract. This is particularly important in cases where the LOI has an exact date where it’s set to expire but both parties have not abided by it and continued the work nonetheless. The foremost issue here is if the price agreed on has already gone beyond then the contractor is not entitled for payment. Another way to look at this is that both parties have agreed to enter into a complete contract they’ve just been negotiating on.

Final contract

The only time an LOI can be regarded as a final contract is if the terms drawn up were the ones that are supposed to be incorporated into the final contract. This is true even if there was no written agreement made for it. Courts take the view that the only thing lacking was the failure to formally execute all the things that have been finally agreed on. When an LOI signifies that there’s an intention to enter into a contract with the standard terms that each party has consented to. This doesn’t necessarily mean that the best results will be achieved for those involved.

Tips on drafting your LOI

Now that we’ve established how crucial an LOI is, it’s important that you know how to draft an LOI in order to protect yourself. Not writing your LOI using the right information and details can render it useless if you and the client come into conflict later.

First of all, you have to determine the scope of work to be done. This will clearly set the boundaries of how much you should do and to what extent. After that, make it clear that the LOI is intended to be the precursor to an interim agreement while the final contract is being negotiated.

To add a layer of safety, you can also add that both parties won’t be bound by the final contract until such time as everything has been executed in a written document. Make it clear as well that any provisions will be waived if either party acts counter to the terms drawn up.

Other information to add in your LOI is the application of any applicable governing law. Mention VAT and where it has already been included or not so that there’s no question about it later on. When it comes to probable instances of disputes, add terms about how it should be resolved. It also pays to mention in the letter who will be the primary instruction giver when it comes to the work being performed.

Lastly, clarify that once the LOI has been included, it will then be applied retroactively. Any payments listed in the letter will be regarded as payments against obligations outlined in the final contract once it has been drawn up.

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