Blog 027 - Rolling the Dice on a Letter of Intent

Letters of Intent have once again cropped up in the Technology and Construction Courts! I will spare the long legal jargon and the rights and wrongs of the case and boil it down to one simple take away for the Specialist Contractor, treat work undertaken on a Letter of Intent like gambling, don’t play with money you can’t afford to lose!

Letters of Intent have a place in the industry and often serve to help greatly when time is against the Client or Contractor needs to get the Specialist to site fast or still has some undefined scope but wants to advance preliminary or preparatory works. However, not perfectly prepared and executed, they can prove to be quite costly for one of the parties, typically the party expecting to receive payment!

The nuts and bolts of this case came down to the fact that the courts ruled that the terms and conditions of the JCT contract had not been incorporated into the Letter of Intent and this ruling overturned the adjudicators decision. The works completed by the Specialist Contractor were valued by the Courts at what will no doubt have been considerably less than they were claiming to be entitled to, in addition they will have suffered the cost of the adjudication preparation, the loss of cash flow and the legal fees for the Court case. Going to court rarely benefits anyone in the long run and it becomes a case of digging deeper and deeper to minimise your financial losses.

Letters of Intent are intended for short duration only and should always have a time and / or value limit. This does put a clock on contract negotiations and the tendency can be to continually extend this limit, however, the further the limit is extended, the more is placed at risk. Letters of Intent, properly drafted, should not be risky however, it is often the unagreed terms that prevented the initial contract formation that can cause the falling out point.

Letters of Intent should be avoided where possible. Employers and Tier 1 Contractors should exercise best practice and programme sufficient procurement time for the onboarding of Specialist Contractors. Likewise, Specialist Contractors should keep their eyes wide open and seek to enter Contracts instead but where not possible, insist on time and value limits and stick rigidly to these terms. Whilst they are used common place in industry, they do form a regular basis for dispute, so avoid wherever possible and get into the mutually agreed contract for the works.

The one take away step, only play with what you are prepared to lose! If that is nothing, get yourself into contract before starting to commit time and costs. Chances are, you will be ok, but the warning is to prevent over leverage of the business based on a Letter of Intent.

If you need help with a letter of intent or agreeing contract terms, drop me an email.