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Letters of intent in construction and engineering

View profile for Derryn Rolfe
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In the construction and engineering sectors, letters of intent are used all the time. The idea of them is to get a project going – either to allow for the procurement of long lead-time items, or to start design, or to hold a tender price – before the parties have actually agreed all the terms of the contract.

Letters of intent work well, if they are properly drafted, but if they are lacking then they can be a complete disaster. It only matters if there is a dispute between the parties before a formal contract is signed, as such a contract would over-ride the letter. But if there is a dispute then not only do they have to deal with the facts and the evidence, but they also have the problem of what constitute the agreement between them.

The legal position of letters of intent

The legal position was set out in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] and is surprisingly straightforward. Depending on the drafting, the court held, a letter of intent could be one of three things:

  • A straightforward contract in its own right. If the terms are such that there is no uncertainty, then the letter is a contract. It is unlikely to be a contract on the terms that the parties were expecting to have, given that they were probably in mid-negotiation when the dispute arose, but the courts will say that the letter is all there is, the negotiations are of no account, and they’re stuck with it. Neither party is likely to be happy.
  • Nothing at all. Not a contract, a nice letter but no actual agreement. A court asked to give judgment on the finances might be forced to apply the quantum meruit approach (colloquially known as “as much as he deserves”). The amount awarded will probably come as a surprise to both parties, as they may not involve any of the carefully-negotiated rates and prices. This result won’t make the parties happy either.
  • An “if” contract. This is what is being aimed for with the letter, and it’s what the parties are expecting it to do. An “if” contract will have enough information that the courts can say “if they had got as far as entering into a contract then the terms would have been these, and the dispute would have been decided by those terms” so it’s not nothing, but will have enough uncertainty about material terms that it could not be considered a complete contract in its own right.

Walking the tightrope between the two opposing situations to achieve the “if” situation is not easy, and there are many items of fact and law that need to be taken into account for each situation. Innumerable court cases – including the original British Steel one - have shown how difficult it is to get it right, and the unexpected consequences of getting it wrong.

If you have any questions about letters of intent, our Construction and Engineering team will be happy to help. Please get in touch for further information.