T017 Letters of Intent

DEFINITION
1. method of instructing the contractor to proceed with the works before the contract has been formally instructed.
CIRCUMSTANCES OF USE
1. Where emp. needs 2 commence the works before a certain date
2. Where there are materials with a long lead in times and it would aid the programme
PURPOSE
1. legally binding agreement until the actual contract is signed that allows work to commence while safeguarding the emp. rights
ELEMENTS
1. Statement confirming intention to enter into a contract + amendments
2. State the intended contract sum
3. identify the scope of works
4. state the limit on vale/time/scope for the leter
5. State that the contract will apply retrospectively
6. State the basis for calculating payment should the main contract not be executed
ISSUE
1. The employer issues the LOI
2. signed by employer and MC
ADVANTAGES
1. allows works to commence b4 the contract if finally agreed - programme benefits
2. Provides more safeguards than just telling the contractor to start without one
DISADVANTAGES
1. May lead to complacency and dis-incentivise them to sign the main contract
2. would not want the works to continue for very long without getting the contract signed
3. While the main contract remains unsigned, the employer is potentially liable to the contractor on a quantum meruit basis. Quantum meruit is a term used to refer to a reasonable recompense for work done, and is often based on the amount of money expended, in addition to a reasonable allowance for profit.
TYPES
1. comfort letters
  1. . A comfort letter expresses the intention of one of the parties to act in a particular way (for example, to enter into a contract), but does not create any legal obligation on that party actually to act in that way. The author of the letter will only be liable for deviating from the stated intended course of action if the expressed intention was not actually held at the time that the letter was signed.
  2. The problems associated with these letters are widely known and it is unlikely that any major contractor would commence work on such a basis. Comfort letters do not create a legally enforceable contract. So long as the intention stated in such a letter is honestly held, no liability arises if the signatory changes their mind and decides not to enter into a contract (see British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984])
  3. When drafting comfort letters, it is important clearly to state that the letter is only a statement of intent and does not create a binding contract. Payment should not form any part of the agreement. The letter should be headed 'Subject to Contract', to make it clear that it does not create a legally enforceable agreement.
2. instructions to proceed with consent to spend
  1. Instructions to proceed with consent to spend are sometimes referred to as 'if' contracts, and usually take the following form
  2. These agreements are legally binding contracts which pre-date and are superseded by the principal contract when it is executed
  3. Letters of consent to spend are very flexible and usually operate on a 'cost plus' basis, failing execution of the main contract
3. the recognition of the existence of binding contracts
  1. Letters recognising the existence of a binding contract between the parties may be used to execute the contract before the formalities of copying, binding and signing the contract have been completed
  2. A letter recognising the existence of a binding contract has similar effects to the execution of the contract itself. If the contract is repudiated after such a letter is in place, but before the contract itself has been signed, the employer will be liable for loss of profit by the contractor on the outstanding works.

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T017 Letters of Intent

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