What are the possible effects of the acceptance of a letter of intent?
A binding contract comes into existence for the carrying out of:
• all the proposed works; or
• the works instructed by the letter alone.
Alternatively no contract comes into existence.
When will an accepted letter of intent result in a binding contract?
The parties intend to enter into a contract – at least at some future stage. All the essential terms for a contract have been agreed – including the identity of the contracting parties, a description of the works, the price for the works and the time for performance.
No other contractual terms have been discussed but have not been agreed by the time of the letter. There is no statement in the letter that its acceptance will not result in a contract.
What scope of work will be covered by a contract created by an accepted letter of intent?
If the letter only authorises those parts of the proposed works instructed under it(for example work up to a specified maximum value), the contract will be for that work alone. If the letter simply authorises the contractor to commence the proposed works, the contract will cover all the works.
How should a letter of intent be drafted to ensure that its acceptance does not result in a binding contract?
The letter should be headed “subject to contract”. It should state that whilst it is the parties’ intention to enter into a formal contract at some future stage:
• the parties do not intend that any contract will come into existence by the letter’s acceptance; and
• the only obligation of the letter’s author will be to pay for the work instructed. If the terms of the proposed contract are still being negotiated:
• this should be confirmed; and
• the terms still to be agreed should beset out, in particular those relating to a description of the proposed works, the price and the time for performance.
If the identities of the contracting parties have yet to be agreed, this should also be confirmed.
What are the parties’ rights and obligations when an accepted letter of intent does not result in a binding contract?
The letter’s author is simply obliged to pay the specified sum for the work instructed or a reasonable sum.
Whilst this payment obligation is only “quasi-contractual”, the party carrying out the work can sue the letter’s author in the courts if he believes he has not been paid his rightful entitlement under the letter.
The party carrying out the work is under no obligation to perform the work instructed by the letter in any particular way or by any particular time – or indeed at all.
This means that the letter’s author cannot sue the party carrying out the work for non-performance, late performance or even defective performance.
If, however, the work carried out is defective, the letter’s author will only be obliged to pay what that work is worth –which may, depending on the nature of the defects, be nothing at all.
Does the Construction Act apply to letters of intent?
Yes, if a letter of intent creates a contract then the Construction Act's provisions will apply.
In particular there will be a right to adjudicate any dispute, the payment provisions of the Act will apply, and there will be a right of suspension.
Please note: These key points are only intended to give general guidance and are no substitute for specific legal advice on any given situation.