UK: Letters of Intent

Last Updated: 14 July 2005
Article by David Thomas QC

First given as a seminar on 19th April 2005

A. Introduction

A letter of intent, usually bearing that title, may be issued by an intending purchaser of goods or services during the course of pre-contract negotiations or immediately after their conclusion. There may be several purposes for doing this. The intending purchaser may wish to ensure that the goods or services he requires are reserved and so remain available until they are finally secured by the intended contract. The purchaser may wish the supplier to place the goods on order to initiate their manufacture where there may be a delay in delivery. The purchaser/client in a construction contract may wish to encourage the contractor to mobilise, pending formalisation of the contract, to minimise delay in commencement of the work.

Traditionally, a letter of intent was regarded as of no contractual effect in most situations (see dicta in Turriff Construction Ltd v Regalia Knitting Mills below).

However, case law has recognised a number of situations where the parties were to be treated as having respective rights and obligations following the issue of a letter of intent, although these cannot be reduced to a single legal proposition.

B. Examples of wording of letters of intent (from SCL Hudson Prize Paper by John McGuinness, Society of Construction Law)

  1. "It is our intention to accept your tender for the (site clearance) work on this contract. Please take this order as an instruction to commence work pending the finalisation of the contract documents for signature" (based on example in McGuinness).
  2. "Please take this letter of intent as indicating our intention to enter into a contract with you for the (steel) work on this project. You are required to commence design work immediately, up to a maximum value of £500,000). In the event of no contract being finalised between us, we undertake to pay all reasonable and proven costs incurred" (based on example in McGuinness)
  3. "Dear Sirs, As agreed at our meeting of 2nd June, it is the intention of Regalia to award a contract to Turriff to build a factory including production, stores, offices and canteen facilities to be built in four continuous phases…. all to be subject to obtaining agreement on the land and leases with the Development Corporation, full building and bye-law consent and the site investigation…. the whole to be subject to agreement on an acceptable contract." (Turriff Construction Ltd v Regalia Knitting Mills Ltd).
  4. "This letter is to be taken as authority for you to proceed with mobilisation and ordering of materials up to a maximum expenditure of £100,000. In the event that our client should not conclude a contract with you, your entitlement will be limited to the proven costs incurred by you in accordance with the authority given by this letter." (Monk Construction Ltd v Norwich Union Life Assurance Society)
  5. "In the unlikely event of the contract not proceeding, (the contractors) will be reimbursed their reasonable costs, all of which must be substantiated in full to the reasonable satisfaction of our quantity surveyor". (C.J. Sims Ltd v Shaftesbury plc)
  6. "We are pleased to advise you that it is [our] intention to enter into a subcontract with your company, for the supply and delivery of the steel castings which form the roof nodes on this project…. We understand that you are already in possession of a complete set of our node detail drawings and we request that you proceed immediately with the works pending the preparation and issuing to you of the official form of sub-contract". (British Steel Corporation v Cleveland Bridge and Engineering Co Ltd).

C. Traditional Position on non-binding effect of letters of intent

In the relatively recent past, letters of intent were regarded as of no contractual effect in most situations.

Turriff Construction Ltd v Regalia Knitting Mills Ltd [1971] 9 BLR 20.

per Judge Fay Q.C. A letter of intent is "no more than an expression in writing of a party’s present intention to enter into a contract at a future date. Save in exceptional circumstances it can have no binding effect…. A letter of intent would ordinarily have two characteristics, one, that it will express an intention to enter into a contract in future and two, it will itself create no liability in regard to that future contract".

(Note, however, that on the facts contractual obligations were upheld).

Courtney and Fairbairn Ltd v Tolaini Bros Hotels Ltd [1975] WLR 295.

In the absence of agreement upon such a fundamental matter as price, it was impossible to say that a contract had been formed. The parties had only reached the stage of negotiation and that could not form the basis of a contract.

per Lord Denning MR "If the law does not recognise a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force".

Sir Robert McAlpine Management Contractors Ltd v London Demolition (UK) Ltd (1990)

Specified procedural requirements for the appointment of sub-contractors can prevent a contract from coming into effect. If the letter of intent does not comply with the requirement, this may bar the assertion of a contract. The judge in the case was "satisfied that it was a condition precedent to an enforceable contract that it should be under seal".

Alldridge (Builders) Ltd v Grandactual (1995) CILL 1225.

Failure to implement procedures under a particular standard form of contract would indicate that the acceptance of a letter of intent did not constitute a contract incorporating that form.

Smith and Gordon Ltd v John Lewis Building Ltd (1993) 44 Con L.R. 11

The letter of intent sent by John Lewis, as contractors, stated that the sub-contract form NSC/1 would be sent by them for completion by the sub-contractor. The sub-contractor orally accepted the letter of intent. It was held that the failure of John Lewis to adopt the procedure which they had outlined, i.e. failure to send the sub-contract, prevented them from relying on the arbitration clause contained within it.

Regalian Properties Plc v London Docklands Development Corporation [1995] 1 WLR 212

The sums which Regalian claimed were held not to be recoverable: "the expenditure for which Regalian claims recompense was for the purpose of satisfying the requirements of the proposed contract … or of putting Regalian into a position of readiness to start the development in accordance with the terms of the proposed contract."

D. The emergence of decisions supporting contractual or extra contractual obligations under letters of intent

Mitsui Babcock v John Brown [1996] 51 Con LR 129

In a contract for the construction of a power station, a letter of intent stated that "principal terms have been agreed through various correspondence and the detailed conditions to be the subject of early mutual agreement in keeping with the conditions of contract MF/1 1988 edition and the proposed amendments issued and discussed at our meeting". The sub-contract supplier and installer of certain equipment argued that there was no concluded binding contract, so that any agreement concluded was void for uncertainty and thus unworkable.

"My review of the authorities leads me to the conclusion that there is no reason in principle why two parties should not enter into a binding agreement, even though they have agreed that some proposed terms should be the subject of further discussion and later agreement".

In this case, the parties had agreed to a computer check of the design. "Both parties signed the contract documents while they were awaiting the outcome of the GE computer check which they knew might lead to a solution…. Neither party suggested that the signing of formal contract documents should be deferred until the result of the check was known".

Monk Construction Ltd v Norwich Union Life Assurance Society [1992] 62 BLR 107

Neill LJ reviews the judgment of Goff J. in British Steel (see below) and makes a general statement that as a matter of analysis a contract may come into existence following a letter of intent.

A letter of intent can give rise to three possible situations:

"There may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other …. There may be what is sometimes called an ‘if’ contract, i.e. a contract under which A requests B to carry out a certain performance and promises B that if he does so, he will receive a certain performance in return, usually remuneration for his performance……

If no contract was entered into, then the performance of the work is not referable to any contract, the terms of which can be ascertained and the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as had been done pursuant to that request."

British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1981] 24 BLR 94.

No contract was created on the basis of the letter of intent itself, but liability was imposed on the basis of a quantum meruit claim.

Goff J: "the true analysis of the situation is simply this. Both parties confidently expected a formal contract to eventuate. In these circumstances, to expedite performance under that anticipated contract, one requested the other to commence the contract work, and the other complied with that request. If thereafter - as anticipated – a contract was entered into, the work done as requested will be treated as having been performed under that contract; if, contrary to their expectation, no contract was entered into, and the performance of the work is not referable to any contract of which the terms can be ascertained, the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as has been done pursuant to that request, such an obligation sounding in quasi-contract or, as we now say, in restitution".

Trollope and Colls Ltd v Atomic Power Constructions Ltd [1963] 1 WLR 333

Megaw J.

Since the parties had, from the outset, contemplated entering into a formal agreement, that agreement should govern the period prior to its execution. There is no principle of English law that a contract cannot in any circumstances have retrospective effect, or that it is in law a nullity.

C J Sims Ltd v Shaftesbury plc

[1991] 25 Con L.R. 72

 

[1991] 60 BLR 94.

A letter of intent (see section B above for wording) was sent asking Sims to commence work, which they did, incurring costs, some of which the client met. Sims then claimed reasonable costs. HH Judge Newey QC accepted their contention that, subject to the reasonable satisfaction of Shaftesbury’s quantity surveyor, Sims would be reimbursed for reasonable costs inclusive of loss of profit and overheads in the event that the contract work did not commence or where negotiations began but failed to reach a conclusion.

Mifflin Construction Ltd v Netto Food Stores Ltd (1993) Unreported.

Mifflin, the specialist structural steel-work contractors, had been issued with a letter of intent, the intention being that they would become a nominated sub-contractor when the main contractor was nominated.

Despite meeting with the main contractor and agreeing details of the sub-contract, including the programme, no sub-contract was entered into. The judge found "a breach by the plaintiffs of their obligation… to conclude a sub-contract with (the main contractor). Clearly, the damages for that breach are the sums for which the defendants are liable to the plaintiffs under the letter of intent".

William Lacey (Hounslow) Ltd v Davis [1957] 1 WLR 932

Barry J held that a quantum meruit claim could be made where the defendant had led the contractor to believe that the project would proceed, encouraging him to produce detailed estimates. The defendant had to pay even though the contractor’s work was ultimately of no benefit to him: the purpose was to assist the defendant in trying to negotiate a claim with the War Damage Commission.

Ben Barrett and Son (Brickwork) Ltd v Henry Boot Management (1994) Unreported.

The defendant claimed the existence of a contract based upon a letter of intent signed by the plaintiff:

The Court found that "there was clear evidence that the parties intended to enter into a sub-contract, and no evidence to support the contention that they did not intend there to be a subcontract until the main contract was signed".

Wilson Smithett and Cape (Sugar) Ltd v Bangladesh Sugar and Food Industries Corporation [1986] 1 Lloyds Reports 378

The letter of intent sent by the purchasers (Bangladesh) to the plaintiff suppliers required the suppliers to enter into a performance bond. The fact that they did so was held to comprise commencement of performance by the suppliers. The purchasers’ subsequent decision not to proceed came too late; the letter of intent had contained all the necessary terms to constitute an offer which was accepted by the suppliers’ execution of the bond.

VHE Construction Ltd v Alfred McAlpine Cosntruction (1997) CILL 1253

The case concerns the question whether, and if so when, a sub-contract was concluded and, if it was, what payment provisions it contained. Negotiations and discussions continued about terms and provisions from January to July 1993. Work had begun on 7th January 1993. HH Judge Bowsher took a robust view: there was "overwhelming evidence that there was a contract between the parties". The court would allow the evidence of negotiation to decide whether there was a contract but not to decide its contents.

Hall and Tawse South Ltd v Ivory Gate Ltd (1998) 62 Con LR 117

Judge Thornton’s extensive consideration of letters of intent is the most recent comprehensive account and required reading on entitlement to remuneration where no express agreement exists, and the possibility of formation of contracts by conduct. There was a contract created by the letter of intent, but it did not contain the arbitration clause which would have been in the subsequent written contract. The employer’s letter of intent had required the contractor to "commence the preparation necessary to achieve a full start on site on (start date)", the employer agreeing to compensate the contractor for "all reasonable costs properly incurred …. as a result of acting upon this letter up to the date that you are notified that you will not be appointed".

E. Recent developments in judicial decisions on letters of intent

The uncertainties of trying to put into place an effective device which meets the needs of both parties were underlined in the recent decision of Emcor Drake and Scull v Sir Robert McAlpine [2004] EWCA Civ 1733. This case arose out of a M&E sub-contract on a hospital project in the West Midlands for the Dudley Group of Hospitals NHS Trust. The essence of the problem was that McAlpine, as main contractor, "could not authorise payment of one penny .... until complete agreement had been reached and recorded." In the Dudley Hospitals case, the problem was to be overcome by a letter and provision for ‘Short Orders’ to allow payment for preliminary works to Emcor as sub-contractor.

The intended effect of the letter in the Dudley Hospitals case was discussed by representatives of the respective sides, speaking on mobile phones in their cars. The evidence was that "reception was poor".

An eight-page letter was issued, referred to somewhat obscurely as a "letter of negotiation", by which Emcor agreed to enter into a sub-contract when called upon to do so. No such sub-contract was ever executed or even produced. Work was done under a series of orders with a stated maximum value which rose from £1 million to £14 million.

McAlpine argued that the effect of this was a contractual obligation to undertake the whole of the sub-contract works. HH Judge Havery in the TCC was not satisfied that this was the intention of the letter. In the absence of the formal sub-contract, there was no binding agreement to carry out the whole of the works (for £34 million) but there was an agreement to carry out up to £14 million worth of work. Following McAlpine’s appeal, the Court of Appeal upheld this decision, in a judgment on 21st December 2004. Since McAlpine had not proffered a sub-contract which conformed to the terms of the negotiations, the judge had been correct in holding that Emcor could not have been expected to enter into a sub-contract for the entire works. The terms of the letter had to be read with the orders, subject to implied terms as to quality and payment, which was the basis of the agreement for the £14 million worth of work, but not the whole £34 million.

The situation was made worse in the Dudley Hospitals case by the "poor reception", both literally and metaphorically, in the parties’ communication about intention. However, in fairness, it must be acknowledged that the problem is a common one, with no magic formula to overcome it.

The cause of the continuing uncertainty is a combination of widely varying practices in communication and expression of intention and the consequent unwillingness of the courts to offer definitive guidance. As HH Judge Thornton put it in AC Controls v British Broadcasting Corporation [2002] 89 Con LR 52: "in construing and giving effect to the language of a letter of intent, it is necessary to take into account the factual background out of which the letter of intent arose." This case contains the best judicial review of the case law to date.

Bryen & Langley Ltd v Boston [2004] EWHC 2450 (TCC)

Bryen & Langley were the successful tenderers in a project to carry out works for the owner, Boston. A letter was sent to the contractors stating that the contract would be in the form of JCT 98. No such contract was ever signed by the owner. The contractors claimed sums due under an interim certificate and when Boston failed to pay in full, they referred their claim to adjudication. However, the Court held that the letter of intent had not incorporated the terms of the JCT form and thus the adjudication provisions were not binding. It therefore followed that the adjudicator had no jurisdiction to determine the dispute.

Mowlem Plc v Stena Line Ports Ltd [2004] EWHC 2206 TCC

Where work was done under a letter of intent limiting Mowlem’s entitlement to payment to a maximum of £10 million, the Court refused to imply a term that the contractor would also be paid a reasonable amount for work carried out in excess of that figure. Whereas a term would only be implied as a matter of commercial necessity, it would be contrary to commercial sense if Mowlem could avoid the upper limit on the right to payment by simply continuing with the work and exceeding it. Accordingly, the parties’ relationship was governed by the letter of intent and the contractor’s total entitlement to payment for works carried out under it was £10 million. The owner was not prevented by estoppel or waiver from relying on the terms of the lettter of intent.

The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

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