Where the intention is to bind both parties to a halfway house between a full contract and no contract at all, the practice is for the employer to issue a letter of intent that is then accepted by the contractor. Unfortunately many letters dignified with that title merely say that the employer “intends to make” a contract and are ambiguous as to whether he intends to make a contract immediately, and if so exactly what contract, or merely is in mind at the moment to make a contract in the future. A recent case illustrates the apparently irresistible wish in the industry to donate money to lawyers:
Employer’s representatives announced at a meeting that they intended awarding a design and construct contract to the contractors. This meant that the contractors had to embark on a period of intensive and expensive work, including preparation of detailed plans and specifications, but it was clear that the formal contract could not be agreed and signed for some time.
The Official Referee held that the contractors had made known to the employers that they required an indemnity in respect of work done between the meeting referred to and the execution of the formal contract. He held also that the contractors regarded a letter of intent issued by the employers as agreeing to give such an indemnity, although the letter merely said that the contract was to be awarded to them and “the whole to be subject to agreement on an acceptable contract”. The representatives of the employers had stated in evidence that the letter of intent actually was intended to exclude any ancillary contract.
Held: viewing the events objectively as a court is bound to do, a contract had been made, ancillary to the intended contract to construct the works, by which the employers were bound to pay the contractors their interim costs. t
Ingredients of a good letter of intent are:
(a) A definition of the employer’s commitment, for example whether he authorises the contractor to place orders for supply of steel, or fabrication also, or to do work on site.
(b) A statement that the employer is not binding himself to a full contract, and that the contractor’s authority under the letter will end on a named date or may be ended at will by the employer if no full contract is made in the meantime.
(c) Method of paying the contractor for orders placed or work done during the currency of the letter of intent—a reasonable lump sum or rates in a bill, paid at some specified date or by monthly interim certificates to be deducted from the first contract certificate (if any), deduction and eventual payment to the contractor of retention, etc.
(d) Provision that any materials bought are to pass into the immediate ownership of the employer, with safeguards against retention of title clauses (p. 262). The purpose of a letter of intent often is to place early orders for materials, and the employer will be in the contractor’s hands if the ownership of those materials remains with the contractor.
(e) The contractor to insure the materials bought and the work on site and against third party claims, generally in accordance with the insurance clauses of the Conditions notwithstanding that the full contract has not been made.
(f) It may be relevant to specify from what date the contract period is to start for the purpose of cl. 43 if a full contract is made eventually—whether from the date notified under cl. 41 or from the date of the letter of intent.
(g) Quality of work done under the letter of intent to be in accordance with the specification, etc.
(h) The terms of the tender documents should be read through carefully to see which, if any, should be specifically applied to the interim arrangement. For example, the arbitration or variation clause or price fluctuation formula. Other terms may be excluded specifically so as to avoid doubt.