Intent or not, the Letter of Intent (LoI) is not intended as an alternative to a binding contract where the parties have clearly expressed and agreed their terms.

Picture the situation: the Employer is after a start before contract negotiations are complete and the Contractor is after an element of security via some form of payment for the work being undertaken outside a formal contract. An all too familiar scenario, occurring far too often and way beyond the legal parameters it may have been intended. As such the topic matter is worthy of a closer scrutiny.

Although the LoI is a legal document – viewed as a form of contract – its drafting is of great importance if it is to be viewed as a binding agreement. One of the key points to bear in mind when drafting a LoI is the clarity of intention. Basic requirements such as setting out the exact scope of the works, how the Employer wishes to pay the Contractor, how long is the document valid for and how do all these parameters sit within the proposed Contract that is intended to be subsequently signed have occupied court time extensively. Lord Clarke, in a recent case RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG externallink has provided the best sound advice to date: “The moral of the story is to agree first and to start work later.”

What you choose to agree, forming the content of your interim agreement described in the LoI, will determine whether that arrangement is binding or non-binding. The courts will, in the first instance, look to see whether the features present in the interim agreement are that of a contract. Lord Clarke in the RTS Flexible Systems case above set out the general principles as: “Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed ... upon consideration of what was communicated between them by words or conduct”. So, the certainty of key terms, some indication as to what issues are yet to be resolved before the proposed Contract is entered into, a maximum cap on the amount to be paid to the Contractor under this agreement and duration of the interim agreement are some basic topic areas to consider.

Another express term worthy of integration into the LoI is some form of dispute resolution mechanism. The recent case of Twintec Ltd v Volkerfitzpatrick Ltdexternallink [2014] EWHC 10 (TCC) demonstrates the importance of incorporating such term into the parties’ agreement. The High Court granted the Claimant an injunction to restrain the Respondent from pursuing adjudication on the grounds that the LoI did not incorporate the terms of the proposed contract (DOM/2 sub-contract) which was relied and acted upon for the appointment of an Adjudicator. Though on the face of it this may appear contrary to the Scheme for Construction Contract, the court viewed it from a different angle. Lord Justice Edwards-Stuart held that the validity of the Adjudicator’s appointment “goes to the heart of his jurisdiction” and unless appointed under the correct contractual procedure, the nomination and appointment will be seen as invalid.

Another recent case will help demonstrate that LoI is only a temporary arrangement, not to be taken past its “sell by” date. In Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd externallink. [2012] EWHC 2137 (TCC) the whole of the works was carried out and reached completion under eight letters of intent. A dispute arose between the Employer and the Contractor after the work reached completion later than scheduled. The Employer was claiming for Liquidated Damages (LADs) listed in the proposed contract as £50,000 per week, not expressed in LoI, as well as denying the Contractor’s claim for additional payment. The Employer relied on the grounds set out in the LoI which stated “In the event that the intended contract is not concluded between us ... you will not be entitled to any further payment whether by way or quantum meruit or otherwise”. The Contractor denied liability and relied on the LoI stating “neither of us will be bound by the intended contract unless and until the written document is executed by us”.

This was eventually settled by mediation with an agreement that the Contractor would not have to pay any LADs and the Employer would not have to make any additional payment to the Contractor. This is where it gets interesting as the Employer, on settlement of its dispute with the Contractor, commenced proceedings against the project manager Turner & Townsend. The Court held that the project manager was liable as he had breached his duty of care, causing the employer loss by ultimately depriving him the LADs, under the JCT contract, the parties were “intending” to contract under at some point in the future which did not happen.

The use of letter of intent, within a construction context, does make commercial sense in the short term and should be seen as such before the proposed Contract is executed. It is, however, not suitable as an interim measure when the Employer and the Contractor are struggling to agree key terms of their main proposed contract.