Letters Of Intent: Overcoming The Pitfalls

Author:Ms Julie Stagg
Profession:Fenwick Elliott LLP
 
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No matter how forcefully lawyers may counsel against them,

letters of intent have an established position in the

commercial and administrative landscape of the construction

industry in the United Kingdom. There is, to a certain extent,

good reason for their use. In the real world where deals are

struck and offices, schools, hospitals and homes, etc. are

built, factors such as materials shortages, stakeholder

expectations and aggressive programmes can trigger a need to

"get on with the job" long before contract

negotiations have come to an end and the lawyers have finished

playing with words.

Authorising activities under a Letter of Intent

("LOI") has practical advantages for employers and

contractors alike. An LOI can, as previously suggested,

alleviate programme constraints by enabling certain activities

to be progressed pre-contract, such as:

off-site pre-construction activities;

the instruction of subcontractors/suppliers e.g. for

prefabricated items, steelwork, etc.; and/or

the instruction of site remediation (in advance of full

planning permission), enabling works and other (limited)

on-site activities.

Open-ended commitments are, however, extremely unwise, both

legally and commercially. Work should not be allowed to

continue in perpetuity under an LOI as it is no substitute for

formal contract terms, and will not (unless carefully drafted

and administered) afford the parties a satisfactory degree of

protection. The purpose of this paper is to highlight many of

the common problems with the drafting and general use of LOIs

and offer some practical advice to those using LOIs on a

regular basis.

If an LOI must be issued, there are several ways in which

the parties can ensure that the document is legally binding. A

binding LOI has essentially three fundamental elements: (a)

intention to enter into a binding agreement; (b) certainty of

terms and of dealings; and (c) consideration.

Identity and intention of the

parties: it would seem self-evident that the

parties must be known to each other and have reached a

consensus as to the purpose of the correspondence between them.

Yet even these basic principles appear to present a challenge

for certain parties engaged in activities pre-contract. Care

should always be taken to ensure that each party understands

the purpose of the proposed LOI and that each party intends it

to be binding until superseded by a formal contract (subject to

agreement of satisfactory terms).

LOIs are frequently issued by surveyors and project managers

on behalf of their clients for expediency; however, this

practice is best avoided whenever practicable. A contractor

would not accept a JCT contract executed by any party other

than the contractor's ultimate employer; therefore the same

discipline should apply to the signature and issue of a

LOI.

In addition to failing to accurately reflect the intentions

of the parties, poor drafting can lead to a variety of other

problems:

Scope/duration unclear: As lawyers

we are frequently asked to review LOIs expressed to authorise

the contractor or consultant to proceed with the whole of the

works or services for an indefinite period and either for full

value or an unconfirmed sum. On such terms, there is very

little incentive for the contractor or consultant concerned to

cooperate with the employer so as to conclude a formal

contract.

Uncertain status of adjudication:

The questionable status of LOIs as creatures of contract can

also cause procedural problems when disputes arise during the

course of authorised works. Bennett v

Inviron1 was an application to enforce an

adjudicator's award. The dispute involved work undertaken

by...

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