The Effects of Letters of Intent

No. 91. 1998 Editor: Peter HarlowE-mail: [email protected]

THE EFFECTS OF LETTERSOF INTENT

by J. B. McGuinness BSC, MSc, FCIOB

Professional ServicesThe Chartered Institute of Building

EnglemereKings Ride

AscotBerkshire

SL5 7TB

Licensed copy from CIS: wolverhamptonuni, University of Wolverhampton, 02/08/2015, Uncontrolled Copy.

Editorial NoteThis paper won the 1997 Hudsonprize awarded by the Society ofConstruction Law.

Entries to the 1998 Prize are invitedo n a t o p i c c o n c e r n e d w i t hc o n s t r u c t i o n a n d e n g i n e e r i n gcontracts, contract administration,c la ims , a rb i t ra t ion and d i sputeresolution, litigation, torts, companylaw, property law, taxation and anyother aspect of law or procedurerelevant to construction.

T h e r e a r e t w o p r i z e s a w a r d e dvalued at £1500 and £750. Entriesshould not exceed 5000 words andshould be submitted to the Society’sM e m b e r s h i p A d m i n i s t r a t o r , 6 7Newbury Street, Wantage, Oxon,OX12 8DJ by 30 September 1998.

John started his career as an articled pupilwith John Laing and subsequently wassponsored for a Building degree at AstonUniversity He has worked for the LaingG r o u p f o r o v e r 2 5 y e a r s i n s i t emanagement roles and has been involvedwith a number of large prestigious projects,including the Falkland Islands Airport andthe new British Library.

In 1992-94 John took a part-time course inConstruction Law and Arbitration at KingsCollege, London.

INTRODUCTION

It is a feature of modern building contracting

that a significant number of both main and

subcontracts are let under a letter of intent,

the intention being to conclude a writtencontract short ly afterwards. Of those

projects which start with a letter of intent a

high percentage will never be concluded

and the work will be completed without an

agreement being reached as to the contract

terms and conditions.

Despite its frequency of occurrence there is

surprisingly little commentary in the legal

texts. Keating only devotes a page to

‘letters of intent’ and Hudson a page and a

half. Both make the point that the extent of

liability will depend on the

facts/circumstances of the case. This is of

little help to contractors or sub-contractors

who finding themselves with a contractual

problem need advice as to their obligations

and rights. Despite this lack of commentthere is, however, a reasonable body of

case law, which can be analysed to reach

some fairly clearly defined principles.

It is generally been held that a contractor or

sub-contractor, who undertakes work undera letter of intent does so at risk. This paper

demonstrates that this view is not supported

by law and that it is the party issuing the

letter of intent who is more often at risk.

One of the main reasons for starting a

contract under a letter of intent is to reach a

more advantageous agreement before

concluding a contract; in practice delay will

in most instances have the reverse result.

It will be shown that it is not necessarily the

act of issuing a letter of intent that leads to

difficulties in determining the status of the

arrangement between the parties but also

their action afterwards.

WHAT IS A LETTER OF INTENT?

A letter of intent is distinguished from other

ineffective or unconcluded contractual

proposals in that there will normally have

been on enquiry sent out by the purchaser

and a tender submitted by the supplier.

The tender is likely to have been qualified so

as not to be open to acceptance. Post-

tender discussions wil l probably have

‘fol lowed. At some point , when the

purchaser wishes work to start, he will write

to the supplier requesting he commence the

work in whole or in part and undertaking

some obligation, usually to pay money, if

the supplier does as requested.

This situation can be distinguished from

cases such as Felthouse -v- Bindley, where

performance was by the party writing and

the second party was to be liable for the

consideration.

FORMS OF LETTERS OF INTENT

A letter of intent can come in various forms

in response to differing needs of the

purchaser.

1. It is quite common, especially with sub

contracts, for the main contractor when he

has concluded his negotiations to issue a

works order for the sub-contracted work.

Typically such an order will state:

It is our intention to accept your tenderfor the XXX work on this contract. Pleasetake this order as an instruction to

commence work pending the finalisationof the contract documents for signature.

The sub-contractor may be required to sign

and return the order form, which may

expressly be a prerequisite to the sub-

contractor being paid for any work carriedout.

In these situations the terms and conditionswill have been agreed between the parties,

but the main contractor will need time to

finalise the documentation, which company

procedures may require to be checked by

the purchasing manager and/or signed by

a director, prior to issue to the sub-contractor.

2. Another form of letter of intent is to

allow a contractor or sub-contractor to start

p r e l i m i n a r y w o r k s u c h a s d e s i g n ,

procurement and/or mobilisation. In these

circumstances a limit on spending may be

set, so as to l imit the l iabil ity of the

procuring party. The letter may also define

the method of costing the work, ‘as actual or

proven costs’. Such a letter may be phrased

as follows:

‘Please take this letter as our intention to

enter info contract with you for the XXXwork. You are required to commencedesign work immediately, up to a valueof £LLL. In the event of no contract beingfinalised between us we undertaken topay all reasonable and proven costs

incurred.’

These conditions can vary considerably. For

instance they may state implicitly that terms

and conditions are to be agreed or thatthere is no intention to create legal or

contractual relations.

THE PROBLEM

In the event that the contract or sub-contract

is concluded shortly after the issue of theletter of intent, then there is unlikely to be

any resultant problem. However, where

there is a significant delay between the issue

of the letter of intent and the execution of the

contract or sub-contract the chances of a

successful conclusion become less and less

likely, since the contractor or sub-contractor

will feel able to obtain a more

advantageous bargain or better able to

resist pressures to accept unattractive

liabilities. Either party will only be deterred

from holding out if convinced that the

position is insecure without the backing of a

formal contract. However, i f a late

agreement is reached and a contract

signed, then there may arise issues as to theconditions under which the early work was

carried out.

It appears to be unusual for a contract is

terminated because the parties fail to agree.The normal situation is that work continues

under the letter of intent for the whole of the

works. Settling claims and disputes where

the terms and conditions are those of an

executed standard form of contract can be

difficult, but are as nothing to the potential

problems where no agreement has beenfinalised.

Finally, there is the matter of the rights of the

parties to terminate their involvement in the

project and the right of the other party to

damages if they do so.

3


WHEN IS THERE A CONTRACT UNDERA LETTER OF INTENT?

In the Court of Appeal judgement in MonkConstruction Ltd -v- Norwich Union Life

Assurance Society 62 BLR 107 Lord JusticeNeill reviewed the judgement of Mr Justice

G o f f i n B r i t i s h S t e e l C o r p o r a t i o n - v -Cleveland Bridge and summarises the result

of a letter of intent as giving rise to three

possible situations:There may be an ordinary executory

contract , under which each party

assumes reciprocal obligations to theother.

There may be what is sometimes calledan ‘if’ contract, ie a contract under whichA requests B to carry out a certainperformance and promises B that if hedoes so, he wi l l receive a certa in

p e r f o r m a n c e i n r e t u r n , u s u a l l y

remuneration for his performance.

No contract exists - ‘if, no contract wasentered into, then the performance of

work is not referable to any contract, the

terms of which can be ascertained andthe law simply imposes an obligation onthe party who made the request to pay a

reasonable sum for such work as hadbeen done pursuant to that request.’

This analysis is preceded by the observation:

‘As a matter of analysis a contract (ifany) which may come into existence

following a letter of intent.’

Since a letter of intent is in effect an offer to

a supplier to commence work ahead of a

contract being formalised, a letter of intent in

itself never establishes a contract. There

must be some form of acceptance by the

suppl ier for a contract to come into

existence.

This view is supported by other judgements

such as that in Mifflin Construction Ltd -v-Netto food Stores Ltd 1993 ORB 66.

‘In my view the true nature of the ‘letter of

intent’ was that it was an offer capable ofacceptance by the plaintiffs.’

In Hall & Tawse South Ltd and Ivory Gate Ltd

this was stated more forcibly:

‘A letter of intent is usually an unilateralassurance intended to have contractualeffect if acted upon, whereby reasonableexpenditure reasonably incurred inrel iance upon such a letter wil l be

reimbursed. Such a letter places noobligation on the recipient to act upon itand there is usually no obligation tocontinue with the work or to underfakeany defined parcel of work, the recipientbeing free to stop work at any time. Theeffect of such a letter is to promise

reasonable reimbursement if the recipientdoes act upon it’.

4

WHEN IS THERE AN ORDINARYEXECUTORY CONTRACT?

Where the supplier signs and returns the

letter of intent, or an attachment accepting

the letter then it must be certain that there is

a binding contract between them. In the

case of Ben Barrett & Son (Brickwork) Ltd -v-Henry Boot Management 1994 ORB 298

the defendant claimed that the letter of

intent, which was signed by the plaintiff,

constituted a contract between them. It was’

held:‘On the evidence, the Court found thatthere was clear evidence that the partiesintended to enter into a sub-contract andno evidence to support the contentionthat they did not intend there to be a subcontract until the main contract wassigned.’

However, if work carries on as requested by

the letter of intent then whether there is or is

not a contract will depend on the wording of

the letter.

A major factor in deciding whether the effect

of a letter of intent an acceptance, becomes

an enforceable contract will be the extentmatters still to be resolved are listed in the

letter. That the law does not recognise a

contract to negotiate, was decided in

Courtney & Fairbairn Ltd -v- Tolaini Brothers(Hotels) Ltd (1975) 2 BLR 97. In this case

there was a clause in the supposed contract

to ‘negotiate fair and reasonable contract

sums’. Inevitably the negotiations failed and

the builder sued for the cost of the building

work. Lord Denning commented:

‘If the law does not recognise a contract

to enter into a contract (when there is afundamental term yet to be agreed) itseems to me it cannot recognise a

contract to negotiate’.

While the existence of terms still to beagreed in a letter of intent leaves the parties

in a non-contractual situation, the situation

may well change as a result of further

agreement. In VHE Construction -v- AlfredMcAlpine Construction ORB 1995 No.

1114 the Judge found:

‘There are some eight items whichappear to need resolving, being:-

measured rates, clause on contractcharges, daywork rates, drainagearisings, vent trench arisings, discount,

programme, responsibility for damage tos e r v i c e s a n d t h e s o u r c e f o r t h eimportation of materials’.

Negotiations between the parties continued

in parallel with construction work and

eventually the final matter was agreed. It

was held that at this point a binding contracthad been concluded:

‘A sub-contract was completed by a

telephone call between Mr Brown andMr Brian Thomson in late February or

ear ly March when they agreed a

reduction in the period of payment,being the last issue to be resolvedbetween the parties and was further

agreed to by their conduct’.

In the case of Mitsui Babcock -v- John Brown(1996) CILL 1196 it is suggested that a

binding contract can be formed where there

are still matters to be agreed:

‘My review of the authorities leads me tothe conclusion that there is no reason in

principle why two parties should notenter into a binding agreement, if thatwas their intention, which is to beobjectively determined, even though they

have agreed that some proposed termsshould be the subject of further discussionand later agreement.’

The Judge went on to say:‘I do not consider that any binding

contract was concluded by JEB’s letter of

intent.’

The Judge does not suggest under what

circumstances a letter of intent, the subject of

further agreement, could be held to be a

binding agreement. In the event he finds

that there is a concluded contract in writing,

despite there being certain matters that

appear still to be agreed:‘In the light of the history of the dealingsbetween BEL and JBE leading up to thesigning of the contract documents, the

immediate circumstances surrounding thesigning and the fact that both- the parties

did sign the contract documents, I havecome to the conclusion that both partiesdid intend to conclude a bindingagreement when the contract documents

were signed.

There then follows a detailed argument as to

why an agreement as to the method of

test ing could be taken as reachingagreement on manufacturing tolerances.

If there are specified requirements laid down

in the main contract for the appointment of

sub-contractors, failure to follow these may

be a bar to a ‘works agreement’ coming into

effect. In Sir Robert McAlpine ManagementContractors Ltd -v- London Demolition (UK)Ltd 1990 ORB 1298 the judge was satisfied

that it was a condition precedent to an

enforceable contract that it should be under

seal. Further, the parties did not intend there

to be a contractual relationship until the

formal documents were executed.

Contract documentation, sent to a supplier

who is acting under a letter of intent, ifrejected on the grounds that it does not

represent an agreement between the parties,cannot be held to be evidence of a

concluded contract. In Kitsons insulation

Contractors Ltd -v- Balfour Beatty Buildings

Ltd (1991) 8 CLD 05-04:‘Balfour wrote to Kitsons, purporting to

accept the revised tender and enclosed


sub-contract documentation, which didnot reproduce the subcontract which had

been summarised in the earlier letter ofintent. It did, however, purport toinclude all the variations to the sub-c o n t r a c t w o r k s w h i c h h a d b e e nproposed since the date of the letter ofintent. Kitsons refused to undertake thesub-contract in that form, and no forma/sub-contract was ever executed by them’.

WHAT CONTRACT IS CONCLUDED BYTHE LETTER OF INTENT?

Where the parties have reached agreement

as to the terms of the contract they wish to

conclude and they sign an interim document

while the formal agreement is being

prepared, then the contract brought into

effect by the signing of the letter of intent

should reflect the intentions of the parties.

There may be one significant exception to

this. Where the intention is for the contractto be under seal, with the resulting 12 year

limitation period, it may be that until the

formal agreement is signed the contract isunder hand, with only a 6 year limitation

period.

Where agreement has been reached on

only some of the terms of the intended

contract, then great care must be taken withthe drafting of the letter of intent if the

benefits of the agreed terms are not to be

lost.

One option frequently employed is to couch

the letter of intent in general terms, such as:

‘In the event of the contract not beingfinalised, the contractor will be paid hiscosts’. When a letter such as this is written

the intention is to resolve the outstanding

matters and finalise the contract or for the

parties to part company. In practice the

frequent outcome is that the negotiations

make l i t t le progress and the work i s

constructed under the letter of intent.

In these circumstances the contractor may

find himself bound to an unintentional

contract which, had he realised the resulting

consequences, he would never have

accepted. In C J Sims Ltd -v- Shaftesbury Plc60 BLR 98, His Honour, Judge Newey QC

found that the letter of intent contained the

following statement:

‘In the unlikely event of the contract notproceeding, (the plaintiffs) wil l bereimbursed their reasonable costs whichhave been and will be incurred and costsfor which they are liable including thoseof their sub-contractors and suppliers,such costs to include loss of profit and

contributions to overheads, all of whichmust be substantiated in full to thereasonable satisfaction of our quantity

surveyor.’

In the event the contract was not concluded.

It was held that the contractor’s right to

payment for the completed work was not to

be based on his tender and the conditionshe had been required to tender against, as

would hove been the case if, as was

expected, the contract had been concluded.

Instead, the entire contract conditions werecontained in the brief words of the letter of

intent read in isolation from the tender andsubsequent negotiations and in a literal

manner. Although this case only concerned

the method and procedures of valuation

there is no reason to believe the same

situation could not arise with regard, to say,

programme.

The restrictions of such a letter of intent

would affect both parties. There would be

no place for a third party such as a contract

administrator or engineer. There will be no

entitlement to make variations, no due date

for completion and no liquedated and

ascertained damages.

I t should also be appreciated that

contractors f requent ly use the word

‘contract’ loosely to mean both the works or

project. In many letters of intent, such as in

Sims the intention may have been to allow

for a situation where Sims did not continue

with the construction work and was not to

relate to the contract in the legal sense.

It is important to distinguish the situation in

Sims where the letter of intent was for the

whole work to be subject of the contract,

f rom letters of intent request ing the

commencement of early activities, such OS

the ordering of materials.

LETTERS OF INTENT FOR INITIALWORKS ONLY

Where the procurement process is running

out of time it is common practice to request,under a letter of intent, the preferred

tenderer to commence his initial or advance

works. These may include a request to

prepare drawings, place on order items on

long delivery, reserve equipment of a

specialist nature and/or set up on site. The

letter of intent will set out the obligations of

the purchaser if the supplier responds to thisrequest. As described above if the supplier

responds by carrying out the work as

requested then a contract for that work andthat work only comes into being. The terms

of that contract are those as stated in the

letter of intent.

This arrangement should give rise to no

difficulties, if either a contract for the

c o n s t r u c t i o n w o r k s i s s u b s e q u e n t l y

concluded or the parties decide that they

cannot reach agreement after all and part

company. However, a not uncommonsituation is that no agreement for theconstruction work is concluded, but the

supplier continues beyond the work as

defined and contracted for in the letter of

intent.

In Monk Construction Ltd -v- Norwich Unionlife Assurance Society 62 BLR 107, this

s i tuat ion arose. The letter of intent

contained the following words:‘Our client has instructed us to confirmthat this letter is to be taken as authorityfor you to proceed with mobilisation andordering of materials up to a maximumexpenditure of £100,000.

In the event that our client should notconclude a contract with you, yourentitlement will be limited to the provencosts incurred by you in accordance with

the authority given by this letter’.

In the event no contract for the construction

work was concluded, but Monk completed

the building. Monk sought payment for the

work, but Norwich Union claimed that the

entitlement was limited to ‘proven costs’, asstated in the letter of intent. The Court of

Appeal upheld the judgement at firstinstance that the words of the letter of intent

were limited to the work done under its

authority and even then only if the supplier

did not proceed to carry out the construction

work.

Lord Justice Neil l made the following

comments in his judgement:

‘One then turns to the third and fourth

paragraphs of the letter of intent onwhich Norwich’s case on ‘proven costs’

principally rests.

It seems to me perfectly clear that thesetwo paragraphs were directed to aproblem which might arise if for somereason no contract for the execution ofthe Sub-Structure Phase II work was everconcluded between the parties.

The letter further provided that ifNorwich did not conclude a contractwith Monk, Monk could claim for the‘proven costs’ which they had incurred in

accordance with the authority given to

them to mobilise and to order a certainquantity of materials.

In my view the provision for the recoveryof ‘proven costs’ was intended to deal

with the situation if no contract wassigned and if no work on the Sub-

Structure Phase II project (apart frommobilisation and the ordering of somematerials) was carried out by Monk.

I agree with the Judge that the ‘provencosts’ formula was never intended toapply to the execution of the main

contract, nor was it intended to apply ifwork on the main contract began.

In my judgement the Judge was correctto conclude that Monk were entitled to

5


be remunerated on the basis of quantummeruit.’

LETTERS OF INTENT FOR THE WHOLEW O R K S

Because the letters of intent are intended tobe an interim measure, pending final

agreement they will rarely be issued for the

entire works. The case of Hall &, TawseSouth Ltd -v- Ivory Gate Ltd 1996 ORB No.

1612 was different in that it required the

contractor to ‘commence the works’. Theletter is quoted in full in the judgement but

significant parts are as follows:

‘We confirm that it is our intention toenter into a formal contract in the form of

the Standard form of Building Contract.

The condi t ions attaching to your

appointment are:

(a) That the form of the Bu i ld ing

Contract and escrow agreement are tobe agreed as soon as practicable.

‘ W e a r e n o w i n s t r u c t i n g y o u t ocommence the Works to be carried outunder the Building Contract, including the

ordering of materials necessary to theintent that you shall use your best

endeavours to achieve the contractprogramme and to act on all instructionsproperly issued under the terms of theBuilding Contract’.

It was held that:‘The Plaintiff had an option of whether to

start or not but, having started, thePlaintiff was under an obligation tocontinue with the works and not to stop,

unless the Defendant appointed anothercontractor or gave notice abandoning

the work, etc. envisaged by the letter’.

Although this was not an issue in the

judgement it appears that one of the factors

which made this letter of intent binding uponcommencing work was that it was for the

w h o l e o f t h e e n v i s a g e d w o r k a n d

subsequent instructions. This is compatiblewith the judgement in Monk.

WHEN ACCEPTANCE OF A LETTEROF INTENT DOES NOT CREATE ACONTRACTUAL OBLIGATION

It has been seen that, in general, it is

absence of disagreement that enables a

letter of intent if acted upon to be treated as

a binding contract. In the absence of any

further qualif ication, the resolution ofoutstanding matters wil l conclude the

contract. Th is was shown in VHE -v -

McAlpine.

While in many situations the parties will be

so close to agreement that the creation of a

6

binding contract at an early moment is their

aim, there will be many circumstances where

the intention is not to proceed into a formal

relationship and/or a commitment to the

project or its costs until certain special needs

are met or decisions are made. Such

circumstances may include the obtaining ofplanning or other approvals, the securing of

the necessary funds, the completion of

feasibility or other studies.

In Peter Lind & Co Ltd -v- Mersey Docks and

Harbour Board 2 L loyd’s Rep.234 thecontract could not be concluded until the

Board had approval under the Harbours

Act. The letter of intent merely stated:

‘Your tender was the lowest received bythe Board and it is their intention toaccept your tender when al l then e c e s s a r y f o r m a l i t i e s h a v e b e e ncompleted’.

By the time the defendants were able to

enter into contract, circumstances had

changed and the plaintiff sought to revise his

p r i c e . I t w a s h e l d n o c o n t r a c t w a sconcluded as the parties were sti l l ‘ in

negotiation on the question of price’.

One commonly used approach is to impose

a limit on expenditure under the letter of

intent. In Monk -v- Norwich Union, the letter

of intent said:

‘Proceed with mobilisation and orderingo f m a t e r i a l s u p t o a m a x i m u mexpenditure of £100,000'.

In the event they spent much more and were

held to be entitled to be paid on a quantum

meruit basis. In this case they had provided

a service well in excess of that described in

the letter of intent. It is possible that if a letter

of intent is, for say drawing work, and limits

the sum to be spent and only drawing work

is in fact done then the expenditure cap may

hold. If the reason for the expenditure cap

is given then it is suggested its effectiveness

is enhanced, under the second limb of

Hadley -v- Baxendale and the cop should

hold, at least until further work is done. Theexpenditure cap will probably be defeated if

the supplier makes it clear that the capped

sum has been expended and further work

continues with the full knowledge of the

purchaser.

An alternative method to restrict the

obligations of the parties resulting from the

acceptance of a letter of intent is to state that

it is not to create legal and/or contractual

relations. This is likely to be a more certain

method as the judgement in Comyn Ching -v-Radius Plc (1997) CILL 1243 suggests:

‘Very often, what is called a letter ofintent is properly construed as a bindingagreement, or as an offer capable ofacceptance. However, I do not soconstrue the letter of 25 November1998.

The correct approach when consideringthe effect of a letter of intent is to look forthe purpose of construing it at the

document itself, at the surroundingcircumstances, and of what happenedwhen it was brought into existence. Thefact that it has the particular label that ithas does not brand it as the outset as acontractual document or as a ‘non-contractual’.

To begin with, the letter of 25 November

is headed ‘Subject to Contract’. In thisinstance, I believe that those words were

intended to mean what they say, and the

parties had no reason to think otherwise’.

The decision of the Judge to look at ‘the

document i t se l f , at the sur roundingcircumstances, and at what happened when

it was brought into existence’ shows a very

different approach to that used whenconstruing a contract. This is very obvious

in Sims -v- Shaftesbury where it was common

ground that:

‘The Defendant’s letter of intent followedby the Plaintiffs commencemenf of work

on site gave rise to a contract between

them’.

Since the judgement was for a sum of money

under Order 14, the Judge did not consider

whether a contract existed, but ruled on the

strict words of the letter of intent.

The judgement in Fraser Williams [Southern)

Ltd -v- Prudential Holborn Ltd (1994) 64 BLR1 gives full details on the use of the phrase

‘subject to contract’, where it was held,

allowing the appellants’ appeal:

‘(1) In order to determine whether acontract had been concluded, it wasnecessary to examine the course of

dealing between the parties, bearing inmind that the phrase ‘subject to contract’

was normally used to prevent a partyf rom being contractual ly bound.However, when used by experiencedbusinessmen, ‘subject to contract’ isn o r m a l l y t a k e n a s m e a n i n g t h a tacceptance must be in writing. On thatbasis, the proposal was not an offercapable of being accepted.

(2) The letter of 10 March amounted tono more than on acceptance that theparties should go a stage further. The

parties’ behaviour indicated that theyboth expected a formal contract to beagreed.

(3) The reason for the letter of 5 Aprilwas that both parties considered that it

was time to put into place the contract towhich the proposal of 3 March wassubject , but , s ince there was no

acceptance, there was no concludedagreement’.

When a purchaser under a letter of intent is


claiming that the acceptance of the letter of

intent constituted a contract under the termsof a certa in s tandard form and i t i s

demonstrated that he did not implement the

procedures of that form of contract then it is

likely that the supposed contract will befound not to exist. In Alldridge (Builders) Ltd

-v- Grantactual (1995) CILL 1225 it was

found:

‘Mr Eastwick himself agreed in cross-

examination that the parties did not in

f a c t a d m i n i s t e r t h e c o n t r a c t i naccordonce with the provisions of IFC84. He agreed that ‘an FC 84 letter ofnotice’ was nowhere to be found, andthat ‘the contract was never fullyoperated to the letter of the law which isset out in IFC 84’. In paragraph 52 ofhis witness statement, Mr Davis identified

numerous provisions in the amendedfrom of IFC 84 which the defendantasserts was intended to apply and whichMr Davis says were not operated. This

evidence is not challenged.

I n m y j u d g e m e n t , t h e r e f o r e , t h edefendant’s ‘fall back’ position cannot be

sustained either, and the terms of IFC 84were not incorporated info the contractbetween the parties’.

THE INCORPORATION OF EARLYINSTRUCTIONS

Unless otherwise agreed, instructions and

variations given before the contract is

concluded and which would be allowable

under the contract once concluded, will

become instructions or variations under thecontract.

In Trollope & Colls Ltd and Holland &Hannen and Cubitts Ltd -v- Atomic PowerConstructions Ltd 3AII ER 1962 1035 MrJustice Megaw had to decide whether the

works done by the plaintiff between the

receipt of a letter of intent in January 1959and the signing of a contract in April 1960

w e r e d o n e u n d e r t h e t e r m s o f t h a t

agreement. The plaintiff sought payment for

that work on a quantum meruit basis. Mr

Justice Megaw saw no difficulty in the effect

of a contract being retrospective:

‘So far as I am aware, there is no

principle of English law which provides

t h a t a c o n t r a c t c a n n o t i n a n ycircumstances have retrospective effect,or that, if it purports to have, in fact,retrospective effect, it is in law a nullity’.

The reason the plaintiff challenged the

validity of the contract signed in April wasthe effect of the large number of variations

that had been carried out between the letterof intent and the contract’s execution. These

variations were not incorporated into thecontract, which reflected the original design

intent. Mr Justice Megaw stated that four

propositions needed to be considered as to

whether the contract was binding:

‘(1) there must have been an intentionby both parties continuing up to April1960, to make a contract;

(2j at that date the parties must havebeen ad idem on all the terms which theythen regarded as being required in order

that a contract should come intoexistence;

(3) the terms on which the parties weread idem must not omit any term which,even though the parties did not realise it,was in fact essential to be agreed inorder to make the contract commercially; and

(4) there must be some manifestationwhich indicated with sufficient clarityacceptance by the offeree of the offer asthen made, such acceptance complyingwith any stipulation in the offer itself asto the manner of acceptance.’

He only found 1, 2 & 4 to be satisfied.

Proposition 3 was satisfied if the terms of the

contract could act retrospectively.‘He accordingly held that a contractcame into existence between the partieson 11 April 1960, for the carrying outby the plaintiffs of the civil engineering

work for the power station, substantiallyon the terms set out by the defendants intheir points of defence, and that the

contract had retrospective effect togovern the relationship of the partiesfrom the inception of the work’.

SPECIAL CASES

The general rule is that a letter of intentplaces on the purchaser the obligation to

pay the supplier for any work or servicedone in response to the issue of a letter of

intent. This may not be true where the letter

of intent states that a specific course of

action is to be taken, such as the enteringinto a subcontract with a third party.

In Mifflin Construction Ltd -v- Netto Food

Stores Ltd 1993 ORB 66 the specialist

contractor Mifflin had been issued a letter of

intent for structural steelwork. In this case

the intent ion was that Mi f f l in would

eventually become a sub-contractor of the

main contractor yet to be appointed.

Budge were appointed as main contractors

and the necessary instructions were issuedby the contract administrator, on behalf of

the employer. Despite meeting with Budgeand agreeing outstanding matters, such as

the programme of the works, Mifflin never

concluded a sub-contract with Budge.

In settlement of their account Budge sent

Mifflin a cheque which was dishonoured

and Budge went into liquidation. Mifflin

then sought their money from the employer.

It was held that Mifflin were in breach of

contract in not having concluded a sub-

contract with Budge and could therefore not

recover their money as a consequence. Itwas held:

‘The fact remains that the forms werenever completed and that the condition

of a sub-contract in form NAM/T Section

III, which was to discharge the contract

based on the letter of intent, wastherefore never fulfilled.

However, although there was a failure ofthe condition which was to discharge thecontract based on the letter of intent, thatfailure was itself, on the facts I have

found, a breach by the plaintiffs of theirobligation under that contract toconclude a sub-contract with Budge bycomplet ing Sect ion I I I of NAM/J.Clearly, the damages for that breach arethe sums for which the defendants areliable to the plaintiffs under the letter ofintent’

Where o letter of intent is phrased so as to

be a clear intention not to formulate a

binding contract, then that clear intent will

not be destroyed by subsequent actions,other than the formation of such a contract.

The payment of money, for example, even if

prior to any performance by the supplier,

will not change an informal arrangement

into a binding contract.

In Comyn Ching -v- Radius Plc {1997) CILL1243 it was held:

‘It is said that when Mr Dixon on behalf

of the defendants accepted a cheque for£15,000 from Mr Culverhouse togetherwith the letter of intent, he thereby

entered into a contract on the terms ofthe letter of intent. I do not accept that.By accepting a cheque for £15,000, thedefendants plainly entered into acontract to do certain work ordered bySWEL, and they also followed normalcommercial practice to ‘get some moneyup front’ for the work they were carrying

out. But I hold that they did not enterinto any further legal obligation’.

One of the most commonly quoted cases, in

connection with letters of intent is TurriffConstruction Ltd -v- Regalia Knitting Mills Ltd

9 B L R 2 0 . T h a t t h i s s h o u l d b e s o i ssurprising since in’ this case the letter of

intent does not conform to the description ofLord Justice Neil in Monk -v- Norwich Unionof on ‘if’ contract being where:

‘A requests B to carry out a certainperformance and promises B that, if hedoes so, he wil l receive a certainp e r f o r m a n c e i n r e t u r n , u s u a l l yremuneration for his performance’.

Turriff -v- Regalia can be regarded as a

special case in that the supplier requested

the letter of intent in the following words,

7


which were recorded in minutes of a

meeting with Regalia:'TTS requested on early letter of intentfrom the client to cover Turriff Ltd for the

intensive design work now commencingand for the essential orders on sub-

contractors necessary to meet a 38 weekphase one programme commencingearly August The client confirmed that

his letter of intent would be forwarded tous as soon as possible’.

Effectively this was an offer to do work for

payment which would be regarded asaccepted on receipt of a letter of intent.

Such a letter of intent was provided in the

following words:

‘Dear Sirs, As agreed at our meeting of2 June I969 it is the intention of Regaliato award a contract to Turriff to build afactory including production, stores,

offices and canteen facilities to be built infour continuous phases.

Phase I to be on a fixed price basis asagreed and phases II, III and IV to becalculated on the same basis as Phase Ia n d c o m p l e t e d b y 1 9 7 2 . T h ecommencing date to be 1 August and theterms of payment to be negotiated on a

monthly form against bills of quantitysupplied by Regalia’s surveyor.

Al l this to be subject to obtainingagreement on the land, and leases with

the Corby Development Corporation, full

building and bye-law consent, and thesite investigation being undertaken byDrilling and Prospecting International Ltd.

The whole to be subject to agreement onan acceptable contract.’

Despite Regalia not expressly undertaking to

pay for work done in advance Mr Justice

Fay found:

‘The defendants made known to theplaintiffs that they required an indemnity

in respect of work done between themand the execution of the contract. I amsatisfied that he understood that theywanted an assurance that they would be

paid even though the contracts were notexecuted.

The letter of intent was given.

The letter of intent was accepted assatisfying the request’.

and the Judge held:

‘They (the plaintiffs) indicated that theywould regard receipt of a letter of intent

as an acceptance of their offer. On 17

June the letter of intent was sent. Unlesst h e t e r m s o f t h a t l e t t e r n e g a t e d

acceptance of the offer, upon its receiptthe offer was accepted and the ancillarycontracts came into existence’.

8

SUMMARY

(1) Letters of intent do not normally create a

contractual obligation, but are more often an

offer open for acceptance.

(2) Accepting the letter of intent may not

effect a contract on the terms of a tender as

submitted for the work and subsequent

negotiations.

(3) Often the letter of intent will identify

matters to be agreed, or declare it to subject

to contract. Such a letter of intent if acted

upon will only become a binding contract

once all outstanding matters are agreed or aformal contract executed, the effects of

which will normally be retrospective.

(4) A letter of intent may limit the work to be

done. Where further work is performed at

the behest of the purchaser and no formal

contract comes into being, the supplier is to

perform in a reasonable time and be paid

on a quantum meruit basis.

CONCLUSIONS

What are the effects of a letter of intent? In

return for any early commencement of work

the purchaser will if negotiations are not

concluded, lose much of the strength of his

negotiating position, a situation which will

worsen with time.

If no contract is concluded the supplier’s

position at law at any rate is very strong.

He has to perform only in a reasonable time

and is entitled to a quantum meruit, often

considered to be cost plus profit or better.

As Lord Justice Neill quoting from Goff Jsays:

‘It would be an extraordinary result if, byacting on the buyer’s request in such

circumstances, the seller were to assume

an unlimited l iabil ity for continualperformance, when he would never

assume such liability under any contractwhich he entered into’.

It must be questioned as to how many

purchasers, keen for their projects to get

under way, rush into a letter of intent

appointment, nor realising that in doing so

they may be throwing away all the thought

a n d c a r e t h e y b e l i e v e d t h e y h a d

incorporated into thei r contractual

arrangements?

Finally, paraphrasing a comment in S NBall’s article in The law Quarterly Review,

where letters of intent are concerned the

concept of caveat emptor is very much alive

and kicking.

ORB Official Referees Business

BLR Building Law Reports

ClLL Construction Industry Law

Letter

CLD Construction Law Digest

Lloyds Rep Lloyds Law Reports

ALLER All England Law Reports


Documents

The Effects of Letters of Intent