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Seek legal advice before drafting letters of intent

Letters of intent are widely used in the building trade, because it is not unusual for both developer and contractor to wish to make progress on a building project without having to wait until the formal contractual arrangements have been fully agreed.

However, letters of intent are fraught with possible pitfalls and have led to a procession of cases coming before the courts.  The best way to ensure their successful use is to take legal advice to ensure the drafting of any documentation is as tight as possible.

Ideally, any letter should:

  • state clearly whether it is intended to be binding or non-binding;
  • state what the rights of the respective parties are in the event that a formal agreement is not subsequently reached.  In particular, care should be taken to ensure that the method of dealing with any dispute and the effects of termination are clearly set out;
  • set out whether it is intended to constitute a contract under the Construction Act (and if it is not so intended, care should be taken that the wording does not unintentionally create such a contract); and
  • set out any financial, time or other limits which apply to the work done by the contractor under the letter of intent.
  • set out how the parties wish the letter of intent arrangement to end.
  • If the Court holds that a letter of intent has expired and nothing has replaced it then:
  • if the letter of intent included a cap on total payment for the employer to the contractor, and the contractor carried out further work after expiry, the employer might argue that it is not liable to make any further payment above the limit.
  • if the letter of intent does not contain a cap, the contractor could claim payment on the basis of a quantum meruit (a reasonable price for the work done).

However, this brings with it its own uncertainties.

Although a letter of intent offers flexibility in the contractual arrangements in the early stages of the project, it is normally desirable for a formal contract to be entered into.

For more information on contractual arrangements contact David Brown, partner and head of the construction team at Gullands, d.brown@gullands.com