Beware letters of intent, for they are the work of the devil’s pen.
Often, you receive a document headed ‘Letter of Intent’, used in the course of your negotiations, pending the completion and formal execution of a contract. It signifies the sender’s intention to enter into a contract with you at some future date, but in the meantime, you are requested to start work towards fulfilling the obligations of that contract. This is often due to a tight schedule where the finality of the contract would delay the start of the project. The significance of such letters can be seen in the numerous court cases, where they have been held to give rise to no contractual relationships whatsoever and have created binding contracts. The consequent risk to both parties is that they are seldom clear and give rise to the interpretation of the single question: “What did the parties actually intend?” The case of Emcor Drake and Scull Limited v Sir Robert McAlpine Limited is an example of the perils of proceeding with work under a letter of intent. The project concerned the design and construction of new buildings and the refurbishment of an existing hospital as part of a private finance initiative scheme in the West Midlands, UK. McAlpine was the main contractor who appointedEmcor the subcontractor to undertake mechanical and electrical works, which at a value of £34.25m formed a significant part of the whole project. McAlpine and Emcor were in discussion for a year before the price for the works was agreed in principle. It had been the parties’ intention to enter into a formal subcontract in the near future, but about 18 months after Emcorcommenced work on site the parties’ working relations broke down due to disagreements concerning the terms and conditions of the proposed subcontract. In the end, no formal subcontract was executed. Emcor ultimately refused to undertake any further work until a formal subcontract was agreed. McAlpine held Emcor’s actions to be a repudiatory breach, contending that a letter of agreement and a series of work orders constituted an agreement to complete the entire installation. Emcor disagreed, and in its defence argued that its only obligation was to design and install the works instructed by McAlpine pursuant to the series of work orders, each valued at £1m. The Court concluded that there was no subcontract between the parties and accordingly Emcor was not obliged to complete the entire works and not in repudiatory breach. The parties placed little importance on the formalities of a written subcontract prior to Emcor commencing work on site, until disagreement about the terms and conditions resulted in a dispute. One witness remarked: ...the risks inherent in the M and E works...in terms of time and cost...there needed to be clear unequivocal agreement from the outset between the parties as to their respective obligations to avoid later difficulties Final thoughts The parties decided, for whatever good commercial reasons, to start work before the terms of its subcontract had been agreed, on a presumption that ultimately terms would be finalised. This case and countless others demonstrate that letters of intent are notoriously difficult to interpret, thus, potentially leading to conflict and a breakdown in an otherwise healthy working relationship.
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Dr. Andrew MilnerDBEnv, LLM, MSc, BSc, MRICS, MCIArb Archives
February 2023
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