Practical Law

It is common practice for parties in the construction industry to undertake work under a letter of intent before the contract is formally executed. This practice ensures that design can be undertaken, materials can be procured, the site can be prepared and, ultimately, work can begin notwithstanding ongoing contractual negotiations.

However, letters of intent often form the basis of disputes and their contractual status can be unclear. For example, letters of intent have been:

• Held to have no contractual effect (Whittle Movers Ltd v Hollywood Express Ltd, where the Court of Appeal held that the appropriate claim for remuneration for work conducted pursuant to non-binding letters of intent was in restitution).
• Characterised as interim but binding contracts (see the recent example of Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd).

Uncertainty, and with it disagreement, is plainly likely when contractors perform work in anticipation of a final contract that is never formally executed. That was the case in RTS Flexible Systems v Molkerei, where the employer sent a letter of intent containing a draft contract. It also contained a “subject to contract” clause which stipulated that the terms within the letter of intent would not be binding unless executed by both parties, which it was not. The Supreme Court held that the parties had nevertheless entered into a binding agreement: on the evidence, the parties had agreed to waive the “subject to contract” requirement.

The recent case of Anchor 2020 v Midas Construction Ltd raised similar issues to RTS but will be of particular importance to the construction industry, not least because the contract in question was a JCT Design and Build Contract, 2011 Edition. Continue reading →