Legal
LETTERS OF INTENT
CHRISTOPHER COVENEY, SOLICITOR FOR THOMAS EGGAR, DISCUSSES THE TRUE LEGAL IMPLICATIONS OF LETTERS OF INTENT AND THEIR PART IN THE CONTRACT PROCESS
Recent experience causes me, once more, to address the use of letters of intent. Letters of intent are normally used where the parties have every intention of entering into a contract, usually in a known form, but where the drafting of the contract has been overtaken by the wish to start on site.
What is widely recognised is that the letter of intent will, itself, usually be a contract. It instructs the performance of works in consideration of the payment of money. It is intended to be legally binding. But whilst the letter of intent may, by reference, incorporate the terms of a particular form of contract, it will rarely incorporate all of the final detail of the contract. If it did, there would be no need for anything more. The intention is that it will be superseded by the concluded contract. But what if it isn’t? In the past, dealing with a project for the refurbishment of an office building, I encountered the situation where the whole of the works were completed under a letter of intent, whilst the contract remained unexecuted and the inconvenient matter of responsibility for the extent and cost of works necessary to an existing structural member, undetermined at the commencement of the project, remained
36 Architects Choice July 2014
unresolved. The employer maintained that all necessary works should have been provided for in the contractor’s tender. The contractor maintained that, in accordance with its tender, they were not. The only concluded agreement was the letter of intent, which did not address the matter. The result was a costly dispute. Of particular concern to me, recently, was the level of costs authorised by a contract administrator under a letter of intent. The sum was approximately 60 per cent of the envisaged contract sum. Accepting that letters of intent will be used where it is in the parties’ interests to start on site before the contract is concluded, they should not be authority to the contractor to complete all the works, as in the case of the office refurbishment project. They should have financial limits or time limits or both, which ensure that the parties do not lose sight of the requirement to conclude their contractual arrangements. There can be no hard and fast rule as to what percentage of the envisaged contract sum should be authorised. Costs may not be spread evenly across the duration of a project. It is suggested, however, that any contract administrator proposing to issue a letter of intent authorising expenditure of more than 25
per cent of the envisaged contract sum should ask themselves why? The amount authorised by a letter of intent may be increased by a further letter. In a high value fit out contract for a company requiring offices and research and development and testing facilities, including high security facilities, the amount authorised by the letter of intent was increased for successive months in the initial stages whilst detailed requirements were being finalised, but the percentage of the envisaged contract sum authorised under the letters of intent never approached the percentage of 60 per cent which we have seen recently. The use of letters of intent should not however be protracted, as an employer may be deprived of the rights or remedies it would expect to have if a project falls into delay. If the letter of intent is to be limited by time, the obvious thing to do is to limit it to the time in which the parties reasonably expect to be able to conclude their contractual arrangements. If the contractual arrangements have not been concluded before they start on site, the sooner they are the better.
And, by way of a sign off, may I suggest that the letter of intent records that it is intended to be superseded by the contract that the parties intend to enter into.
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