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
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The content of this update is provided for the purposes of general
interest and information. It contains only brief summaries of
aspects of the subject matter and does not provide comprehensive
statements of the law. It does not constitute legal advice and does
not provide a substitute for it.