healthcare update - issue 10

Letters of intent - exploding the myths

So, you’ve spent the last six months designing and then tendering to let a contract for building works and you need to start on site yesterday. Apparently, there’s no time to get a contract sent out and certainly no time to get all the sign offs needed from top brass. Can you just send out a simple Letter of Intent which solves all your problems?

Well, it’s a case of Yes and No.

Yes, in that you are a consenting adult and can make your own decisions - taking responsibility for them. No, because Letters of Intent are dangerous creatures which can turn round and bite if things do not go according to plan - which has happened before with construction projects. Is the risk justified? Do you feel lucky?

In limited circumstances, for example where materials on long lead-in times need to be ordered early, Letters of Intent can be useful - subject to the principles below. As a general rule, because Letters of Intent tend to be uncertain, they are to be avoided if at all possible. Unless very carefully drafted, and even then, they will define the parties’ relationship less clearly than a proper contract when it comes to the essentials - what is to be done, for how much, when, and on what legal terms and conditions as well as a range of other important matters such as insurance. In short, they are likely to contain holes - which create uncertainty. If there is a problem down the line, uncertainty won’t help the parties to resolve it - quite the reverse. Remember that English Law does not step in to provide a clear default position.

If you have gone through the procurement process, it is likely to be more cost effective and quicker to put the contract together and get it signed. If you can’t do so, then why not? Does something important remain to be agreed? If so, should you be committing to the other party under a Letter of Intent and thereby giving away your negotiating position? How important in real terms is the net saving of time which will be achieved? Does it really justify the taking of risks inherent in a Letter of Intent?

What is a Letter of Intent?

The classic understanding of a Letter of Intent is that it is a letter saying something along the lines of “we intend to enter into a contract with you but cannot do so at the moment but we want you to start the works. Please do so and we will pay you a reasonable sum for the works.”

The above is riddled with uncertainty, which helps to misalign expectation and provides a fertile breeding ground for disputes.

If one really has to be used then it needs to be a bespoke mini contract, tailored to suit the precise needs of the initial phases of a project, and to set out exactly what it is that you are asking the contractor to do. The law is not interested in what you thought you were asking the contractor to do, but instead what you actually put down on paper as being the parties’ obligations.

If you get it wrong, the resulting uncertainties, e.g. a reasonable sum for the works, could amount to more than the tendered rates and prices. Likewise, what happens if you cannot reach agreement to allow the contract to be entered into, how do you bring the relationship to an end and on what basis? You may well also struggle to get the contractor to sign up to the contract, at least without negotiating changes, because your negotiating position will have vanished and all the hard work procuring the project will have been compromised.

So what should a Letter of Intent cover?

It needs to amount to a self contained contract in its own right. The following is a generic list and not all encompassing but in summary it should define precisely:

• What works the contractor is to undertake - by reference to a specification or similar
• How the works will be valued - the rates and prices for the works
• When instalments will be payable to the contractor?
• The maximum amount which the employer will agree to pay and what happens if that is used up
• The programme – what timescales are required (otherwise the early start may be pointless)
• Ownership of materials and a license in respect of design work
• The legal terms and conditions applying to the relationship
• How the relationship can be terminated. What will be payable to the contractor - work done and demobilisation costs? Or could he claim loss of profit?
• The insurance position - who is responsible for insuring? What if someone gets injured? What if property gets damaged?
• The position when the contract proper is agreed. The contract should be stated to apply retrospectively to the works carried out under the Letter of Intent

Hang on a minute! The contract we want to enter into deals with all these points and more. Use a Letter of Intent only if absolutely necessary and remember that one size doesn’t fit all.

If a Letter of Intent has to be used then it should be referenced back to the contract documents, for example the Employer’s Requirements and the Contractor’s Proposals.

We see many Letters of Intent which simply do not deal with the above issues and regrettably, English law does not step in to plug the gap on what you thought you were getting. Disputes can be messy, uncertain and expensive.

talk to us

Shaun Tame 0121 237 4552 Partner

Michael Sadler 0115 976 6599 Solicitor