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...

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