The construction industry commonly uses Letters of Intent to enable projects to commence whilst the final construction contract is being agreed. Whilst this approach does have the benefit of enabling parties to commence work prior to execution of the final contract LOI’s are usually written in summary format and it is this lack of detail that can create contractual risk.
In the first instance both parties must ensure that a contract has been formed, there must be an offer from one party, acceptance from the other, some form of consideration and it must be clear that both parties intend to be contractually bound.
The terms of the LOI must be followed, for example it is common for LOI’s to apply a financial limit to a specified amount. It is also common practice for parties to exceed this limit. In Mowlem v Stena Line Ports the contractor did just that and exceeded the financial limit, the Court ruled that the LOI was clear and his claim for costs above the financial limit was rejected. Another common clause is an expiry date for the LOI. If works continue past this date then no contract will exist between the parties and the only way of recovering costs will be to bring a quantum meruit claim which could be to the disadvantage of the contractor as it will be the Court to decided what a reasonable sum is.
Care should be taken to ensure that the LOI adequately describes the protocols should the works be stopped prior to expiration of the LOI.
As noted above Commencing work under an LOI should be avoided unless there is good reason to do so and always both parties should undertake to formalise the main contract as a matter of priority and with the utmost urgency. Due to their nature LOI’s offer basic protection therefore both parties should ensure that the LOI offers sufficient safeguards for their respective positions whilst the main contract is at large.
This article contains information of general interest about current legal issues and does not provide legal advice. It is prepared for the general information purposes only. This article should not be relied upon in any specific situation without appropriate legal advice.