What are the different types of letter of intent?
- COMFORT LETTER – to reassure intention to create a contract. The least detailed, lacks contractual items so isn’t typically legally binding. Only liable for loss of profit if the intention expressed wasn’t held at the time of signing
- Consent to spend – give permission to pay for works that are being done, details relating to what can be undertaken with a cap on value and sometimes a cap on time. - Legally binding. IF! ‘If you commence works whilst negotiaions, we will reimburse you reasonable costs should the contract not be entered’
- Recognition of contract – has contractual details, e.g. dispute resolution. Offer the most protection to parties of the contract. Client may be liable for costs and losses to contractor. - Legally binding. Employer liable for loss of profit on outstanding works should contract not be entered
What is needed to make a LoI a legally binding contract?
- Agreement i.e. key terms
- Intention
- Consideration
When would you use a letter of intent?
A letter of intent should only be used where there are good reasons to start work in advance of concluding the formal contract (usually in cases of commercial urgency) and should be used merely as a safeguard of legal rights while the contract documents are being finalised.
- Immediate start on site required
- Long lead times
- Contract details still being negotiated
What typical clauses might you find in a letter of intent?
- Definition of works
- Scope of works
- Contract sum
- Cap on spend
- Payment provisions
- Expiry date - date for contract to be agreed
- Dispute resolution procedures
- Limit of liability
- Insurances
- Governing law
- LD’s
- Termination
What are the dangers of using a letter of intent?
- The details of the contract have not been finalised
- The contract is ‘at large’ - more difficult to negotiate onerous terms
- Over reliance - tendency to extend
- There are no detailed provisions for interim payments, a rectification period, liquidated damages or for introducing change - Ampleforth vs T&T
- Removes focus from being signed - can lead to professional negligence claims
How can a Client get a contractor to start on site prior to drafting and signing a contract?
Through use of a letter of intent.
Why did you use a LoI at Coventry AME?
High market fluctuations in material prices with tender price due to expire, long lead times, planning terms due to expire and contract details being negotiated.
Inflation - 17% on the quarter for steel
Lead times - 20 weeks for roof
Tender expiration
What was included in the LOI issued to Coventry?
- Reference to tender documents issued November 2020
- Expiry - contract to be complete by 10th October
- Contract reference
- CP’s - LD’s @ £3k/week; PII @£5m; Rectification period 12 months
- Contract sum @ £3.2m
- LOI @ £1.7m
- Termination clause - 7 days notice, limited clients liability to LOI total
What were the packages included in your LOI?
- M&E - £1.3m
- Roof - £200k
- Steel - £100k
- Demolition / alterations -£100k
What would a LOI comprise?
- Start Date (when it comes into effect)
- Expiry Date (When the letter becomes invalid)
- Scope (Works covered)
- Value (maximum value of works undertaken)
- Intention to enter into formal contract
- Key Terms & Conditions
- Insurance (Provisions required)
Can a QS draft a letter of Intent?
No, as QS’ we can give guidance on clauses and content, but it must be drafted by a solicitor
What makes a letter of intent legal?
’- Agreement
- Intention
- Consideration
Arcadis v. Buchan - argued that no contract had been formed but judge ruled completed work & payment formed the contract
What case law are you aware of relating to LoI? What can be learned from it?
Arcadis V. Buchan - specialist subcontractor on car park design. Contract / no contract. Jude found work was complete and payment made therefore was a legal contract despite not having a formal protocol agreement
T&T PM V Ampleforth - estate. Carried out works on 8 LoI, no contract. Ampleforth awarded damages due to loss of chance as no LD’s in LOI and contractor finished 4 months late
What is in a typical assignment / novation agreement?
- Effective date
- Identification of existing agreement including parties, and parties rights
- Identification of party making assignment and statement of their desire to assign their rights
- Identification of other party and statement of their consent
- Section stating initial contract is continued, other than the change to parties
- Include clauses relating to
Assignor still owes obligations to other contracting party (Assignment)
Original contract extinguished (Novation)
