United States: Letter Agreements: Risks, Purpose, And What To Include

In the fast-paced construction market, contractors on smaller projects, and even some contractors on bigger projects, might be asked to begin work before entering into a formal written contract. While oral agreements can be binding and enforceable1, they are not recommended because they leave the substantial possibility that the parties will later disagree over their respective interpretations of the agreement or whether an agreement was reached at all. At the risk of stating the obvious – it always makes sense for construction professionals to put their agreements in writing before any work begins.

When a formal contract is not possible, parties should consider entering into a letter agreement that, at minimum, includes the essential terms of price, scope of work, and location of the project.2 A letter agreement reduces important business terms to writing to allow work or services to start before a more definitive agreement is signed. "Letter agreement" is not a legal term and these type of preliminary agreements go by many other names, including: Letter of Intent, Limited Authorization to Proceed, Limited Notice to Proceed, Term Sheet, and Early Start Agreement. The important thing to consider is what is contained in the agreement, not what it is labeled.

Various reasons exist that might cause parties to enter a letter agreement before the execution of a formal contract. First, the parties may not be able to reach agreement on all risk allocation terms of a formal contract in time for an owner to be able to meet a deadline instituted by its lender, a zoning authority, local ordinance, or some other consideration out of the owner's control. Second, a fast-track project in which construction and design are proceeding concurrently often results in very tight scheduling constraints for contractors that does not leave time for the parties to negotiate a formal contract.3 Third, the owner may want the contractor to perform certain preparatory work before entering into a formal agreement. For example, the owner might ask the contractor to mobilize at the site, begin preparing submittals, order long lead items, or lock in its subcontractor and supplier pricing before entering a formal agreement. Finally, the parties may not be able to agree on essential elements, such as price or scope of work for the overall project. In these instances, the parties might want to move forward with certain preliminary work using a letter agreement because they can only agree on the price for a beginning phase of the project.

All of these scenarios most often affect the first trades on a project, such as site work and utility contractors. As a result, it is vitally important for these contractors to understand the benefits and risks associated with the use of letter agreements. Reasons parties might not want to agree to an early start agreement include:

  • The protections of a definitive contract are not in place, which means contractors run the risk of not being paid or incurring legal fees to recover for work performed without a contract. Owners run risks when they do not have a definitive contract in place as well, including the risk of being required to pay for change orders without a signed agreement because no change order process is in place.
  • Risk that a definitive agreement may never be signed and the parties' obligations will be governed by a letter agreement meant only for preliminary work.
  • Shifting of bargaining power. Once the parties have begun work and are invested in a project there is less willingness to compromise on contracting positions.
  • Flow down problems. For example, if a contractor is asked to lock in pricing and order long-lead items, it cannot incorporate terms and conditions of a prime contract into its subcontracts or purchase orders before the prime contract exists.

In addition to the above, when parties agree to execute a letter agreement they risk the possibility that the letter agreement will be deemed unenforceable as a mere "agreement to agree" even if one of the parties intended otherwise.4 An agreement to agree is an unenforceable agreement which seeks to bind two parties in order to negotiate and enter into a contract with the intent that the final agreement will be embodied in a formal written document and that neither party will be bound until the final agreement is executed.

The line between an enforceable agreement and a mere agreement to agree is a thin one based on the facts and circumstances of each case:

"Where definiteness is apparent and the parties act consistent with it, early start agreements may be deemed enforceable contracts. In the construction industry, the search for definiteness invariably invokes contract construction and interpretation consistent with trade custom and practice, and with the underlying facts. The boundary between indefiniteness that may be clarified by judicial construction and omissions resulting from outright lack of assent often is drawn between mere failure to discuss a matter as distinguished from outright discussion and failure to agree."5

In Building Materials Wholesale, Inc. v. Triad Drywall, LLC6, for example, a drywall installer brought a breach-of-contract action against its materials supplier based on a letter agreement. After providing a letter agreement with a quoted price to the installer, the drywall supplier purchased materials and continued to negotiate contract terms, including price. Eventually, the drywall supplier sold the materials to a different installer for substantially more money than it quoted the original drywall installer arguing that it had no contractual obligation to the original drywall installer. The court disagreed and held that the conditional letter of intent followed by assent by conduct to a follow-on subcontract constituted a binding contract, because "assent to the terms of a contract may be given other than by signatures."

To avoid disputes regarding the scope and enforceability of a letter agreement, the parties should be careful to include certain language in their letter agreement, including:

  • The essential elements of cost, scope of work, location, and time.
  • A provision regarding the intention of the parties for the letter to be binding, or not binding.
  • A statement that a contract is not formed for other services and work until the definitive written agreement is signed. Otherwise, there is a risk that the parties could form an oral contractor or implied in fact contract for all of the work even though they are still negotiating terms of a formal written contract.7
  • A statement that the formal contract will supersede the letter agreement so that the provisions in the formal contract will apply going forward and, to the extent possible, retroactively to the work performed under the letter agreement.
  • A provision regarding the right to terminate or cancel if a written formal contract is not signed within a certain amount of time. Otherwise, there is a risk that the service/work will continue indefinitely under the early start agreement.8

Letter agreements do not provide the specificity and clarity found in standard form agreements, which can be detrimental to both parties. While letter agreements may be a necessary evil in some cases, the parties should ensure that the formal contract is executed as soon as possible. A letter agreement should never be considered a substitute for a formal contract.

Footnotes

1 See, e.g., Turner Broadcasting System, Inc. v. McDavid, 303 Ga. App. 593, 596, 693 S.E.2d 873 (2010) (collecting cases recognizing the validity of oral agreements).

2 The essential terms for a construction contract are price, Jackson v. Williams, 209 Ga. App. 640, 643, 434 S.E.2d 98 (1993), scope of work, Burden v. Thomas, 104 Ga. App. 300, 121 S.E.2d 684 (1961), location, Harris v. Baker, 287 Ga. App. 814, 817, 652 S.E.2d 867 (2007), and sometimes time. See, e.g., Jackson, 209 Ga. App. at 643 (finding oral construction contract unenforceable where there was no agreement regarding the material to be used for construction, the location of the construction, the estimated cost of the project, or the time for completion).

3 See, e.g., Marshall Contractors, Inc. v. Brown University, 692 A.2d 665 (R.I. 1997) (finding no enforceable contract where contractor was "authorized to commence site work and to relocate utilities at the building site although no formal contract had yet been executed in order to accommodate the project's so-called fast track construction schedule plan").

4 Doll v. Grand Union Co., 925 F.2d 1363, 1367 (11th Cir. 1991) (finding "agreements to agree or preliminary statements of intent to contract in the future are unenforceable").

5 1 Bruner & O'Connor Construction Law § 2:8, Express contracts – Definite contract or "agreement to agree" – Letters of intent (August 2017 Update).

6 287 Ga. App. 772, 653 S.E.2d 115 (2007).

7 Turner Broadcasting System, Inc. v. McDavid, 303 Ga. App. 593, 693 S.E.2d 873 (2010).

8 Other provisions that should be considered in a letter agreement are terms dealing with changes, payment, insurance, and indemnification.

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions