Regular readers of our e-updates will know that in 2005 the courts in Scotland looked at letters of intent in the case of Robertson Group (Construction) Limited -v- Amey Miller (Edinburgh) Joint Venture & Others.

On 13 July 2006 the Technology and Construction Court in England decided the case of Cunningham & Others -v- Collett & Farmer and considered circumstances when a letter of intent was appropriate.

The Facts

The claimants engaged the defendants to act as their architect in the refurbishment of Bengeo Hall in Hertfordshire. The defendants sent out invitations to tender to two contractors whose bids were in excess of the claimants’ budget. The claimants decided to engage one of the contractors on the JCT Standard Form of Contract for Minor Works, 1998 Edition (MW98) subject to the agreement of a reduced workscope to bring the works within the budget.

On 31 January 2003 the parties agreed that a letter of intent would be produced. However, it was not in fact produced until 14 February 2003. It authorised certain preparatory works up to a financial limit to be carried out. The contractor ceased to be involved in the project at the end of April and before the principal contract had been finalised. The defendants ceased work due to non-payment of fees. They obtained an award in their favour from an adjudicator and sought to enforce that award. The claimants raised a court action alleging negligence and the actions were consolidated. The claimants submitted, amongst other things, that the defendants had been negligent in entering into a letter of intent when it was inappropriate as a matter of principle and in light of the matters to be agreed.

The Decision

The court ruled that a letter of intent could be appropriate when:

  1. the contract workscope and price were either agreed or there was a clear mechanism in place for such workscope and price to be agreed;

  2. the contract terms were, or were very likely to be, agreed;

  3. the start and finish dates and the contract programme were broadly agreed; and

  4. there were good reasons to start work in advance of the finalisation of all the contract documents.

The judge stated that whilst letters of intent were used too often in the construction industry as a way of avoiding difficult questions about the final contract, he did not consider that letters of intent were always wrong in principle. In all the circumstances, the letter of intent was not premature.

This case is helpful guidance on the appropriate use of letters of intent and may reassure those who view them as a "necessary evil".

Disclaimer

The material contained in this e-update is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.

© MacRoberts 2006