Common reasons for using letters of intent include enabling: construction works to commence while contract terms are finalised; and orders for materials that may have long lead in times to be placed; and early preparation. What happens if the contract is never formalised through a signed agreement in writing ? The outcome of analysis by the courts may be either unexpected or unwelcome or both. A look at some cases decided in recent years will highlight the risks involved and make parties think twice before using letters of intent and ensure their use is limited to circumstances where there is no practical alternative.
Arcadis Consulting (UK) Ltd (Formerly Hyder Consulting (UK) Ltd) v AMEC (BCS) Ltd (Formerly CV Buchan)[PB1] [2018] EWCA Civ 2222
Buchan was engaged to do specialist concrete works on a car park build in Bournemouth. Buchan engaged Hyder to do the design works. The work eventually developed faults, namely cracking and concrete breaking away. There was a possible need for a full rebuild. The main contractor held Buchan liable, who in turn blamed Hyder. The question of liability turned on the details of the letter of intent Hyder denied liability, but said 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 as referred to in contract negotiations. No contract was signed following the initial letter of intent issued by Buchan instructing them to commence works. The court e rejected Buchan’s argument that no contract had been formed.
Mr Justice Coulson had considered that the parties could not be taken to have agreed that Hyder’s liability was to be capped at the amount set. There was too much uncertainty and too much that was not agreed for the court to conclude, on any objective analysis of the correspondence, that the parties intended to be bound by a liability cap. Therefore Buchan was entitled to pursue Hyder for the full amount of its loss.
Spartafield Ltd v Penten Group Ltd [2016] EWHC 2295 (TCC)
The issue in the case was whether the parties’ relationship was governed by a letter of intent or a contract. Claims were made for additional work that had been undertaken by Penten. This was referred to adjudication. The adjudicator decided that the letter of intent applied and therefore Penten were entitled to further payment. Spartafield commenced proceedings to overturn the decision on the basis that the letter of intent had been replaced by a JCT contract agreed by the conduct of the parties in that they had agreed almost every detail and worked by reference to the scope, dates and price. The court agreed that although there was no signed the contract the parties’ conduct gave rise to a contract. The judge reviewed all the relevant documents that passed between the parties. He concluded that everything had been agreed for the main contract, This meant that, although the main contract had not been signed, it had in fact been formed, replacing the letter of intent and the adjudicators decision was set aside.
RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co. KG [2010] 1 WLR 753
The case involved a letter of intent marked “Subject to Contract”. The letter of intent included an expiry date, and the question of whether the contract did or did not incorporate the MF/1 conditions. The court was required to distinguish between terms that were critical to the formation of the contract and those which, while of economic significance, were not intended to be a precondition to a concluded and legally binding agreement.
The defendant was ultimately successful in an appeal to the Supreme Court. The Court considered the communications between the parties with reference to their words and conduct and whether it could be objectively concluded that honest sensible businessmen in the position of the parties intended to enter legally binding relations. In the circumstances, the argument that there was no contract did not convince the court. Where a contract is negotiated “subject to contract” and work begins before the final contract is executed, it depends on the circumstances as to whether the parties waive the subject to contract term. In this case, the unequivocal conduct of the parties led to the conclusion that they had made a binding agreement to waive the “subject to contract” provision.
Marking something “Subject to Contract” does not necessarily mean that there no contract will arise unless a signed agreement results. The uncertainty that arises is unhelpful to both parties and likely to result in the need for legal advice or even a costly dispute.
Lessons learned
- Be clear as to the works covered by the letter of intent e.g. only works such as purchasing of materials with long lead in times.
- Do not undertake works that are not covered by the letter of intent as this could be give rise to a contract or may give rise to a dispute as to the basis on which they should be valued
- Finalise and sign the agreed contract before works beyond the scope of the letter of intent are undertaken, if not you may be bound by terms you may be taken to have agreed to through communications and/or conduct.
- At the very least ensure that where scope increases the provisions for extending any financial cap are activated and/or a fresh letter is issued.
In a future issue we will look at points to consider when drafting or reviewing letters of intent.