Take extra care when accepting Letters of Intent

Barrister Rudi Klein gives some timely advice on Letters of Intent.

What is a Letter of Intent?

Letters of Intent (LoI) are in regular use across the industry, and often feature regularly in disputes in the courts. In its simplest form, a LoI is a statement of intention to enter – at some stage – into a legally binding contract. In the meantime it’s an invitation for you to carry out certain work pending the negotiation and finalisation of your agreement with the other party. Traditionally a LoI is signed by the parties as a means of commencing work as quickly as possible, allowing time for the contractual documentation to be drawn up.

This all seems very commonsensical but there are pitfalls galore in signing LoI. These vary from lack of precision regarding the scope of the work to be covered by the LoI, to failure to agree on the contractual documentation; by which time the LoI may have lapsed.

Most importantly a LoI may not, in itself, be a contract if it is simply an intention to enter into a contract at a later stage. If work has already been done under the LoI you may have to pursue your payment via a quantum meruit claim. This is a claim for a reasonable sum for the work. What is a reasonable sum will often be hotly disputed. It would be preferable if the LoI was an interim contract relating to the work to be carried out under it.

Another problem area arises when a LoI comes to an end before you have finalised your contract with the other party. This arose in the recent case of Anchor 2020 v Midas Construction Ltd.

Anchor v Midas

Midas had won a tender to build retirement homes for Anchor. Pending agreement on the terms of their contract, Midas began work on the basis of a LoI. A series of LoI were issued with the last one expiring on 30 June 2014.

A few days beforehand Midas had signed the contract documentation but the client, Anchor, had refused to sign it. This was because Midas had attached a risk register to the documentation which had not been agreed by Anchor. In the meantime the work continued until a dispute arose over the final account.

The court had to decide whether a contract existed. It suited Midas to argue that there was no contract; they had hoped to avoid a liquidated damages liability. Without a contract they could recover outstanding monies via a quantum meruit claim (assuming they constituted a reasonable sum). By the same token it suited Anchor to argue that there was a contract.

The court’s decision

The court held that there was a contract as soon as it had been signed by Midas. The basis of the court’s judgment was that Midas had continued to carry out its work as if a contract was in place. For example, claims for payment, variations and extensions of time were all made in accordance with the contract provisions. In any event the bulk of the contract had been agreed. By subsequently adding the risk register to what had already been agreed meant that it could not be a part of the contract documentation. Neither was it necessary that both parties should have signed the contract (although there were two signature blocks for the parties’ signatures).

Summary of advice for Scaffolding Association members

Where a Letter of Intent is in use, Scaffolding Association members should:

• Clearly define the work to be carried out under the LoI, the payment for that work and how payments are to be made;

• Where further work is to follow, ensure that another LoI is issued prior to commencement of that work;

• If a LoI has an expiry date make clear that work will cease until the re-issue of a LoI;

• Don’t leave a vacuum – ensure that any formal agreement is finalised (and that you are happy with it) whilst there is still a LoI in place.

After more than 18 months of unbroken and unprecedented stability, the fluctuations in demand experienced over the past three months have been strange. That’s according to data collected by Builders’ Conference on behalf of Build UK. Against a backdrop of political upheaval and economic uncertainty, the very fact that the sector emerged from Q3 down only 12% by value compared to Q2, shows a possible newfound resilience. The sector seems to be coping admirably at the moment with a fluctuating and unpredictable marketplace. It could have been different. Having reported an upbeat 613 individual contracts valued at a combined £4.7 billion in July, the results in August felt hugely disappointing.

A monthly total of just £3.3 billion split across 513 individual contracts carried with it a sense of foreboding. However, September rode to the rescue. And even as the monthly calendar flipped to October and the beginning of a 31-day countdown to what was anticipated might at last be Brexit, the UK construction sector still had much to smile about. Buoyed by the award of the latest tranche of HS2-related works, construction contracts researched by Builders’ Conference passed £6 billion in September, eventually notching up a monthly total of £6.5 billion. Although Q3 fall recorded a 12% dip in the value of construction contracts awarded, more ominous was the 23% decline in the number of contract awards – down to 1,669 in the quarter. However, once again, context is everything, with the first three quarters of 2019 representing a 28% increase in value of contracts and 9% increase in number compared to the same period in 2018.

With Brexit the major issue for the new Government and HS2 delayed, there is still plenty to keep the mind occupied!

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