REUTERS | Jason Lee

Adjudicating under a letter of intent

Whether the Construction Act 1996 applied to letters of intent was an issue that troubled practitioners and the courts for a number of years. From the various cases that considered this issue, the answer seemed to be that each case would turn on its own facts (that classic lawyerly phrase!), but the Act would apply if the letter of intent was a “complete agreement”. In other words, if the letter of intent satisfied the requirements of section 107, the parties were “parties to a construction contract“.

So, what happens to letters of intent now that section 107 has been repealed?

Letters of intent after the LDEDC Act 2009

With the repeal of the “in writing” rule in section 107, the scope of what may be a “construction contract” has been widened to include those contracts that are partly or completely oral. This will not only benefit those parties who never get around to entering into a formal contract or who have oral variations, but it will also (potentially) have ramifications for those parties entering into letters of intent.

Whether a letter of intent is a construction contract will be a question of fact. If each case turns on its own facts, I think it is difficult to set out a rule about what will (or should) happen.

Looking at some of the past authorities, it is easy to see that things may be different going forward. For example in both Bennett v Inviron and Mott Macdonald v London & Regional Properties Ltd, the contractor had carried out far more work than the letter of intent provided for. On both occasions, the court held the parties may have reached agreement on the additional works, but they had not put that agreement into the letter of intent. In Bennett, the parties had reached an oral agreement; in Mott Macdonald, the parties’ subsequent agreement was recorded in writing, just not in the papers used in the adjudication. Consequently, their agreements did not satisfy section 107.

Without section 107 requirements to comply with, it is arguable that a court looking at these cases today would reach a different conclusion.

However, regardless of how previous cases have dealt with letters of intent, some factors will remain unchanged. For instance, the parties will still need a “complete agreement”, as HHJ Coulson QC (as he was then) put it in Harris v Ridgewood. So, they will still need to agree the scope of works, the price, the contract period and anything else that may be relevant (like retention and liquidated damages). They will still be able to rely on the Scheme for Construction Contracts 1998 for payment and adjudication terms, and will still be able to incorporate the terms of a standard form contract in their agreement (Cubitt v Richardson). The difference is that for contracts entered into post October 2011, the parties will not have to put all of these things in writing anymore, they can agree to them orally. In future, the letter of intent may just be the starting point for the parties’ agreement, rather than the “complete agreement”.

A letter of intent conundrum

A letter of intent was entered into in August 2011. Construction started and the works completed during September 2011. In December 2011, the parties signed a formal contract for the works. Subsequently, a dispute arose and the parties could not agree on whether their contract was governed by the amendments in the LDEDC Act 2009. There are two possible alternatives:

  • The formal contract merely recorded (and did not add to) the parties’ earlier agreement, which was reached prior to the amendments coming into force. Therefore, the Act’s amendments do not govern the parties’ agreement.
  • The letter of intent contained conditions, including that a formal contract would be entered into. As such, that would result in the parties’ contract being formed later, and subject to the Act’s amendments.

Another example of the many shades of black in construction.

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