Some of you may recall that I have previously had cause to write a paper on letters of intent. The article was called “Letters of Intent, Lies and Damn Lies” and was published in May of this year. The time has come to write again on this subject.I am not sure why it is that the construction industry insists on issuing letters of intent like confetti thrown around at a wedding. Letters of intent are a seriously dangerous entity and I am absolutely convinced that parties who draft these documents simply do not understand just how much liability they can be exposing their clients and, as a result, themselves to.
What is a letter of intent?
Sorry, but there is no magical definition. Each one has to be looked at on an individual basis. What rights arise from such a letter? Is a contractor entitled to be paid if it does work in reliance on the letter? The answer to these questions and many others like it is that it depends.
The most common form of the letters of intent in circulation are nothing more than an attempt to deceive a contractually naive party into doing something for free. A letter that simply says “it is our intention to enter into a contract with you” provides the recipient with no legal rights whatsoever. The letter concerned is nothing more than a statement that something may happen in the future. If a contractor or sub-contractor proceeds to do work, then the work done is nothing more than a gift and you should not expect to get paid for that gift! Let’s not be shy - we all know this goes on.
Sometimes the intention is accompanied by a request for the recipient of the letter to undertake some work. BUT this does not create a contract in its own right. The good news is that a contractor will be entitled to be paid something for the work it does in reliance on the letter but on what basis? Will it be on a quantum merit basis? Will the Contractor be entitled to charge for overheads and profit? Be prepared to spend a small unrecoverable fortune in the courts finding out the answer to these different questions.
If the letter of intent defines a description of work to be done, the price and a programme, then this is likely to be recognised as a simple contract in its own right. But don’t assume that this is an answer to all your problems. What are the terms of this simple contract? Be prepared to spend another small unrecoverable fortune in the courts finding out the answer to this question.
There is no magical formula to drafting a perfect letter of intent. Beauty is said to be in the eye of the beholder and one man’s meat is another man’s poison. Are you drafting a letter attempting to get something for free? Or are you to be the recipient of such a letter, wishing to obtain a degree of protection for work done? Whatever your motivation, it might be a good idea to ask yourself some basic questions which will help you decide on the form of the letter required.
Questions to be asked…
Are you intending to create a contract or not?
What work, if any, are you expecting to be done by the recipient of the letter?
What drawings, scope and specifications apply?
Is the work to be done part of a larger project for which a contract will be issued at some point?
What will happen when the contract is finally drafted for the project as a whole?
Is the contractor going to be left with an entitlement to be paid under the letter of intent and then again under the contract?
Will a subsequent contract cancel the letter of intent? How will payments already made be treated?
When is the letter of intent to take effect? When will it end?
Is the letter to have a retrospective effect on work already done?
How will the contractor be paid? At the end of the work, by stage payments or by monthly valuation of work done? Are there to be payment certificates? Who will issue them?
Who will decide the value of the work done?
How will VAT be treated?
How are you dealing with CDM responsibilities?
Are you including a procedure for dealing with disputes?
Is there to be a financial cap on the financial liability under the letter?
Who is to insure the works and on what basis?
Are you drafting the letter as the client or as an agent of the client? Does the client know? Have you the authority to issue it? Have you told your boss? Have you informed your PI insurers?
Are you intending to ensure that the Employer and Contractor will sign the letter so no party can later claim that it was ignorant of the arrangement?
There can be no doubt that letters of intent are a highly risky business. If you have to use them, be as clear as possible. There can be no doubt that it would be better to finalise a formal contract at the earliest opportunity. Do you really need to take the risk?
Peter Vinden is a practising adjudicator, arbitrator, mediator, expert and conciliator. He is Managing Director of Vinden and can be contacted by email at email@example.com