UK: Letters of Intent: Avoiding those Bear Traps*

Last Updated: 31 March 2017
Article by Claire King

The use of letters of intent can be fraught with difficulty. In this Insight we review the key case law on letters of intent of the past few years and seek to highlight some of the lessons that can be learned from them.

Introduction

Letters of intent are widely used in the construction industry as a way of letting procurement, site preparation or indeed construction works commence before the negotiations for the detailed construction contract have been completed.  The exact form they take varies widely but, typically, they will provide for a contractor or subcontractor to start an aspect of their work associated with the project. They often expressly provide for a cap on value1 or a drop dead date after which the letter of intent will no longer be valid.  It is not uncommon to see such limits repeatedly increased or revised letters of intent being issued, as the contract negotiations between the parties drag on. In one case Fenwick Elliott advised on, 27 separate letters of intent had been issued and the construction contract had still not been signed.

Many commentators (with good reason) advise against the use of letters of intent2 and they are frequently criticised for not being used with "adequate care and attention" by contractors and employers alike.3 Too often they are used because people are used to using them, and consider them to be part of the process, rather than because they actually need to use them. It is also not uncommon for the lawyers to be called in too late, i.e. to interpret what has already been written and agreed rather than to write the document itself.

However, the commercial reality is that sometimes, in order to keep a programme on track, letters of intent do need to be used. It is with this in mind, that we will look at some of the lessons emerging from recent cases and then suggest some practical tips for those considering or entering into a letter of intent.

Is there a contract?

Perhaps the most common argument running through the cases is whether any binding contract has been reached as a result of the letter of intent. Various tactics are sometimes used by parties to try and avoid a binding contract being reached. A classic tactic used by contractors and their non-legal advisors is marking the letter of intent "Subject to Contract".

RTS v Muller

The leading case on this remains the Supreme Court case of RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co. KG.4In the opening paragraph of his judgment Lord Clarke noted:

"The different decisions in the courts below and the arguments in this court demonstrate the perils of beginning work without agreeing the precise basis upon which it is to be done. The moral of the story is to agree first and to start work later." [Emphasis added]

The case involved a letter of intent marked expressly "Subject to Contract" which also had an expiry date, and the question of whether the contract did or did not incorporate the MF/1 conditions.  

Lord Justice Clarke summarised the principles as to whether or not there was a binding contract, and, if so, what the terms might be as follows:

"45... It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms or economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement." [Emphasis added]

In the Muller case, the Supreme Court held that the contract included the MF/1 conditions (as amended). Whilst there were some terms still to be agreed, those terms were not essential and did not prevent a contract existing. By their conduct, the parties had affirmed the existence of the contract by carrying out the works, making payments, and by varying the contract. In agreeing the variation to the delivery programme, the parties were implicitly accepting that there was a contract already in place and to deny the existence of one would therefore make no commercial sense.

Finally, the Supreme Court decided that the requirement that the contract had to be signed before it became effective had been waived by the parties. The Court held that no reasonable businessman would have felt, at the relevant date, that there was no contract in place between the parties.

Marking something "Subject to Contract" does not then mean that there is in fact no contract.

Arcadis v AMEC5

In the more recent case of Arcadis Consulting (UK) Limited v AMEC (BSC) Limited,6 the issue as to whether there was a contract also came into play, with the Judge (Mr Justice Coulson) citing paragraph 45 of RTS v Muller in reaching his conclusion.

In this case Buchan (AMEC), who acted as the specialist concrete subcontractor, engaged the Claimant known as "Hyder" to carry out certain design works on a car park in anticipation of a wider agreement between the parties that did not materialise. It was alleged that the car park was defective and might need to be demolished and rebuilt at significant cost. Hyder denied liability but also said that if they were liable, there was a simple contract in respect of their design works, pursuant to which their liability was capped in the sum of £610k.

Buchan argued that there was no contract because the correspondence envisaged a formal Protocol agreement with detailed terms and conditions. The absence of a final Protocol agreement precluded the existence of any contractual relationship between the parties.

As Mr Justice Coulson stated:

"In circumstances where works have been carried out it will usually be implausible to argue there was no contract." [Emphasis added]

This was a case where work was done and paid for on the basis of instructions from Buchan, which were accepted by Hyder. It was not a case in which any of the relevant correspondence was marked "Subject to contract". Instead, works were performed on the express understanding that, if the anticipated detailed contract did not come to pass, the correspondence between the parties would create a legal relationship between them and ensure that, amongst other things, Hyder would be paid for the work it undertook.

There was an instruction, and the fact that Hyder carried out the design work pursuant to that instruction evidenced a contract between the parties. The Judge therefore held that there was a binding, simple contract between the parties.

Overview

Theoretically, then, whilst it is possible to have non-contractual letters of intent (defined by Chitty on Contracts as "the expression of intention by A to enter into a contract with B at some time in the future, coupled with an indication from A to B that B should commence work"7), the reality is different.  If the works have been started then it is extremely likely that a contract will be found to exist.

So what are the terms?

The key question then turns to "so what are the terms of the contract?" The complications that can be associated with letters of intent often revolve around this seemingly basic question. All too often not enough thought has gone into what will happen if the contract is not concluded. It is then that the ambiguity and uncertainty can often wreak havoc and legal costs start to mount.

Arcadis v AMEC yet again provides a classic example of what not to do. In that case there were three competing sets of terms and conditions which Hyder had very carefully made sure it did not accept. In retrospect Hyder desperately wanted the liability to apply. Unfortunately for them, Mr Justice Coulson considered that there was too much uncertainty and too much that was not agreed for the court to conclude that the parties intended to be bound by a liability cap in the way Hyder alleged. He noted that:

"Whilst the court should always strive to find a concluded contract in circumstances where work has been performed ... the court is not entitled to rewrite history so as to incorporate into that contract express terms which were not the subject of a clear and binding agreement." [Emphasis added]

Whilst the Judge acknowledged that this might be regarded as a harsh result, he felt that he was bound to conclude that:

"this was the inevitable consequence of Hyder's dilatory and often uncooperative approach to the proposed Protocol agreement and the negotiation of the terms and conditions. This case starkly demonstrates the commercial truism that it is usually better for a party to reach a full agreement (which in this case would almost certainly have included some sort of cap on their liability) through a process of negotiation and give-and-take, rather than to delay and then fail to reach any detailed agreement at all."

As can be seen from this quote, the Judge was clearly not impressed with Hyder's conduct.

Ampleforth v Turner and Townsend8

In the earlier case of Ampleforth v Turner and Townsend a failure to agree a detailed contract resulted in the Employer being unable to levy liquidated damages during the currency of the contract.  As a result of this, the settlement Ampleforth reached with the Contractor (Kier) was, they claimed, lower than it would have been otherwise. They then claimed against their advisors, arguing that they had been negligent in failing to advise of the risks associated with letters of intent and closing out the terms of the contract (which they were successful in arguing).

Am I still working on the letter of intent or am I now working on an agreed construction contract?

The case of Spartafield v Penten Group,9 [2016] EWHC 2295 (TCC). which was finally determined in September last year, further underlines the dangers of letters of intent. In that case both parties had already been through the adjudication process earlier in the year.10 A key issue in the case was whether the letter of intent governed the relationship between the parties, or an unsigned new contract incorporating the JCT ICD Conditions had been entered into. In the end Mr Alexander Nissen QC (sitting as a Deputy Judge) determined that a new contract had been entered into despite there being no signed contract. He determined that although it was the parties' intention to sign a construction contract, it was never made a precondition to the formation of a replacement contract that it should be formally executed.

Before they got to this judgment, the parties had been involved in a three-day hearing as well as numerous adjudications and enforcement proceedings.11 Clearly, this was in no one's interests, but the case underlines the dangerous ambiguities that can accompany the use of letters of intent.

Other potential difficulties

There are numerous other difficulties potentially associated with letters of intent. Some key ones to think about include:

  1. What happens to the contractor's tender submission?  Is it still open for acceptance or does the letter of intent (depending on its contents) constitute a counter-offer which opens the door to the Contractor to renegotiate the submission at a later date, e.g. its price, programme etc.?  It can be worth stating expressly that the Contractor's tender remains open for acceptance to avoid this issue arising.
  2. Does the letter of intent as drafted incorporate the underlying terms? If it does, have the Contract Particulars been filled? Perhaps not if the contract terms haven't been agreed. Does this mean the terms don't work (for example, in relation to the insurance position)? Presumably if the construction contract is still being negotiated some of the terms proposed by the Employer were not acceptable. Does the letter of intent incorporate these terms as well?
  3. What happens once the cap and/or time period in the letter of intent is exceeded? In Diamond Build v Clapham Park Homes12 the courts did not order payment to be made beyond the cap despite extra work being undertaken by the Contractor.13
  4. Is there an express right within the letter of intent for the Employer to instruct the Contractor to carry out more work, or can they simply decide to walk off if they wish to?14 If there isn't an express right to instruct more work, what is to stop the Contractor walking off site if terms can't be agreed? Letters of intent frequently state there is no obligation on an Employer to instruct more work under the letter of intent. Where does this leave the Contractor?  
  5. What is the position with regard to insurance? If you are the Contractor or Subcontractor, what is the insurance position? If you were to cause a fire or flood in the building you are working on (for example, whilst commencing stripping out works for an interior fit-out), would you be liable for all the loss or will the Employer's insurance cover you for the losses? If you're the Employer, does the Contractor or consultant have the insurance you think they do or have an obligation to procure it?

All too often in our experience the points above are not properly considered. With this in mind, we set out some practical tips for those considering using a letter of intent.

Some practical tips

First, before deciding to agree a letter of intent both parties should stop and ask themselves why a full contract cannot yet be entered into.  If the answer is that there are still difficult points of negotiation to be agreed between the parties, then entering into a letter of intent is unlikely to make these difficult issues go away. From an Employer's perspective it places them arguably in a weaker bargaining position as the Contractor is on site and works are under way. From a Contractor's perspective there is always a risk that the Employer will decide to use someone else, which they are likely to be able to do if, for example, the letter of intent provides for an express expiry date or a cap on the amount that can be incurred under the contract in question.

If there is no choice but to enter into a letter of intent, approach it on the assumption that the main contract may never end up being agreed. What are the key essential terms you need in that letter to ensure you don't face years of litigation along the lines of Muller v RTS or Arcadis v AMEC?

Once you have a letter of intent in place, don't stop progressing towards agreeing the main contract.  Professional advisors should also be sure to press for the construction contract to be finalised and warn of the dangers of this not being done. 

Although it may seem beneficial not to agree terms at the time, the advantage of having clear contract terms is that you know what your commercial risk is. A limitation of liability, for example, gives you certainty as to what your maximum liability will be if a worst case scenario occurs.

As noted by the Judge in Ampleforth v Townsend and Turner:

"efforts to finalise the contractual arrangements were of central importance. The execution of a contract is to be seen not as a mere aspiration but rather as fundamental. It is the contract that defines the rights, duties and remedies of the parties and that regulates their relationships. Standard-form contracts, such as the JCT contracts, are precise, detailed and structured documents; their elaborate nature reflects the complexities of the projects to which they relate and attempts to address the many and varied problems that can arise both during the execution of the works and afterwards. By contrast, letters of intent such as those used in the present case are contracts of a skeletal nature; they pave the way for the formal contract, once executed, to apply retrospectively to the works they have covered, but they expressly negative the application of most of the provisions of the formal contract until it has been executed. They do not protect, and are not intended to protect, the employer's interests in the same manner as would the formal contract; that is why their 'classic' use is for restricted purposes." [Emphasis added]


  • * With thanks to Dave Bebb and Ed Colclough for their practical tips, and Laura Bowler for her legal research on this topic.
  • 1. See for example the cap provided for in the letter of intent at issue in the recent case of Spartafield Limited v Penten Group Limited [2016] EWHC 2295 (TCC).
  • 2. See the City of London Law Society Standard Form Letter of Intent Guidance Note for example.
  • 3. Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] EWHC 2509 (TCC) at para 53.
  • 4. [2010] UKSC 14.
  • 5. For a detailed review of this case see Jeremy Glover's article in Dispatch dated 3 November 2016.
  • 6. [2016] EWHC 2509 (TCC) at paragraph 51.
  • 7. See Chitty on Contracts, 32nd edition, Sweet and Maxwell, chapter 37-060, as well as Sarah Fox's SCL Paper "Can letters of intent help you avoid lawyers?", November 2016, for further discussion in relation to this.
  • 8. Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137 (TCC). See Jeremy Glover's detailed note on this case in Dispatch, August 2012.
  • 9. Spartafield Limited v Penten Group Limited
  • 10. See Penten Group Ltd v Spartafield Ltd [2016] EWHC 317.
  • 1. Mr Alexander Nissen QC noted that "In his Judgment Coulson J described the 'almost maniacal desire of the parties to issue notices of adjudication against each other' and that 'this impulse seems to have overwhelmed every other consideration'. It is fair to say that the proceedings brought before me were conducted with no less vigour than was apparent to him at the time." (See paragraph 5 of his judgment.)
  • 12. [13] [2008] EWHC 1439 (TCC).
  • 13. [14] The letter of intent in this case set out when the works were to commence and the Contract Sum, and also stated that(i) it was CPH's intention to enter into a contract with DB on the basis of the JCT Intermediate Form of Contract, 2005 edition, with further amendments as specified in the Specification; (ii) should it not be possible for CPH and DB to execute a formal contract in place of the letter of intent then CPH would reimburse DB their reasonable costs up to and including the date on which DB was notified that the contract would not proceed provided that the Supervising Officer was satisfied that those costs were appropriate and that in any event total costs would not exceed £250,000; and  (iii) the undertakings given in the letter of intent would be wholly extinguished upon execution of the formal contract.
  • 14. [15] In Spartafield Limited v Penten Group Limited [2016] EWHC 2295 (TCC), the judge concluded that the letter of intent in question allowed each party to walk away until a formal contract was entered into but that issue in itself was in dispute between the parties (see paragraph 93 of the judgment).

Please click here to view previous issues of Insight

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Claire King
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.