Considering letters of intent

Letters of intent are widely used in the construction industry and continue to cause considerable difficulty. It seems that the procurement processes of large construction projects have become so complex that contractors are generally able to mobilise construction operations far more quickly than it is possible to assemble the necessary contractual and commercial documentation for the placing of a contract.
Indeed, the current trend towards partnering type arrangements, while perhaps bringing certain benefits, may
be encouraging a relaxed attitude towards the placing of clear
and definite contracts before works proceed.
A letter of intent ordinarily expresses an intention to enter into a contract at a future date, indicating that no contract is secured by the letter itself. The reality is, however, not quite as simple as that. As always, it is a case of relying on the facts of each instance, as to whether the sending of a letter of intent can give rise to any, and if so, what liability.
Where the letter of intent can be shown to be a "subject to contract" type of arrangement, there will generally be no contract between the parties, with the consequence that the contractor will be obliged to complete such works as it has undertaken within a reasonable time and be paid a reasonable price.
An example of this approach was found in the case of Galliard Homes -v- J Jarvis & Sons in 1999. The parties had reached agreement on all the matters that would normally be required for a contract to be formed, but the contract preliminaries contained a clause that very clearly stated the contract between the parties was to be executed as a deed under seal. The Court of Appeal held that the agreement between the parties did not have legal effect until a formal contract, being a contract under seal, was signed by the parties.
Different view of the facts
The Court of Appeal took quite a different view of the facts in the more recent case of Harvey Shopfitters v ADI. Harvey submitted a tender to carry out refurbishment works in properties belonging to ADI.
Through its architect, ADI issued a letter of intent to Harvey, confirming that it was its intention to enter into a contract with Harvey on the basis of the tender sum and that the conditions of contract would be those of the JCT Intermediate form.
Harvey was asked to accept the letter as authority to proceed, but if for any unforeseen reason the contract should fail to proceed and be formalised, then any reasonable expenditure incurred by Harvey was to be reimbursed on a quantum meruit or reasonable price basis.
Thereafter work continued, but no formal contract was prepared incorporating the JCT Intermediate form. Disputes arose, and Harvey claimed that the work had been carried out with an entitlement to be paid a reasonable price, whereas ADI contended that a lump sum contract had been formed.
The Court of Appeal held that by the time of the letter of intent, the parties had agreed all issues and there was nothing left to discuss or formalise. A contract had therefore been formed. The mere fact that the parties had contemplated executing formal documents did not detract from the clear intention of the parties to be contractually bound.
Lord Justice Latham noted that the letter itself could not be read in isolation. It formed the culmination of a process between the parties that had resulted in an agreement as to price and all material terms necessary for the commercial working of the contract. All necessary ingredients for a valid contract were present.
While the behaviour of the parties leading up to the issue of a letter of intent may therefore be important in understanding the effect of the letter, it is important to recognise that the behaviour of the parties after the letter of intent will not ordinarily be taken into account.
Interim payments
From commencement of the works, interim payments had been made to Harvey pursuant to certificates issued in accordance with the JCT Intermediate form.
Architect's instructions had been issued in accordance with the requirements of the Inter-mediate form, and the final account had been settled, taking as its starting point the tendered sum, again all in accordance with the requirement of the Intermediate form. Nevertheless, none of this was relevant in determining whether the parties had intended to be bound by a contract incorporating the terms of the Intermediate form.
It was understandable that the parties might manage their affairs for interim payment, extension of time and the like by reference to the terms of the contract they anticipated later agreement upon. That did not, however, indicate agreement of the parties to the formalisation of the contract.
Similar issues were examined earlier in 2003 in the case of Tesco -v- Costain, where Judge Seymour said: "The fact that the parties have behaved towards each other in anticipation of the conclusion of a contract between them in the manner which would have been appropriate if they
had in fact concluded the contract, concerning which they were in negotiation, is of little value in resolving the issue of whether there was in fact a concluded contract."