Letters of Intent: A Salutary Warning

September 2008

It's common practice in the construction industry for projects to get underway on the basis of a Letter of Intent.  These Letters of Intent usually contain a cap on the maximum expenditure and are to remain in place until the execution of a formal contract.  All too often however, contractors carry on executing work above and beyond the cap and employers continue to issue instructions without ever formally issuing a contract.

This was the issue brought before Mr Justice Akenhead in the case of Diamond Build Limited v Clapham Park Homes [2008].  Clapham Park Homes ("CPH") invited Diamond Build plc ("DB") to tender for refurbishment and regeneration works on a number of houses and flats on the Clapham Park Estate.  Following DB's tender a Letter of Intent was issued by CPH which confirmed their intention to enter into a JCT IFC 2005 contract with DB.  The letter detailed the contract sum and noted that should a formal contract not be issued CPH would reimburse DB's costs up to a maximum of £250,000.

DB commenced the works on the basis of the Letter of Intent and began engaging its subcontractors.  During this time the Contract Administrators had issued 5 Contract Instructions and DB's Application for Payment No.3 was over £325,000.

Five months after commencement, CPH became disenchanted with DB's performance and, following advice from its solicitor, wrote to DB to instruct that no further work was to be carried out.  DB refuted the allegations in this letter and argued that the JCT contract had now come into existence and CPH would have to follow those rules of termination.

DB sought a declaration from the court that by the time its relationship with CPH had been terminated the Letter of Intent had been replaced by the JCT standard form.

In reaching his decision, Mr Akenhead considered a number of the leading authorities on letters of intent which held that it was very much dependent on the circumstances of the case.  His first decision was that the Letter of Intent did give rise to a contract between the parties, particularly given the requirement to the sign letter, which both parties did do.

Mr Akenhead went on to analyse how the Letter of Intent operated.  He found that the cap was not unfair because it was open to DB to let its contracts on the same basis and to approach CPH for an increase when it was nearing the cap.  The Letter of Intent related solely to the tendered work and anything else was therefore outside the copy and recoverable under a side contract.  The Letter made it clear that it was only to cover the period between the commencement of the works and the formal execution of the contract and the Specification referred to in the Letter required the contract to be entered into under seal.

DB also raised a point of estoppel but Mr Akenhead found that estoppel of any type did not arise because neither party made representations that the Letter of Intent was to be abandoned and meeting minutes continued to make reference to the issue of contract documents.

On that basis, DB's claim was dismissed and this serves a salutary warning to those who are carrying out work under a Letter of Intent:

• be clear as to what the Letter of Intent covers;
• will a contract only come into existence on a formal execution under seal?
• if the contractor is reaching the cap he needs to make the employer aware;
• are you carrying out other works not covered by the original scope?

Above all don't assume that because you've exceeded the cap and issued valuations in accordance with the proposed contract that the contract has come into existence.  The courts will take a robust view of the Letter of Intent and what the parties meant by it.

The full transcript of the case can be found here.

This article contains information on current legal issues but is for information purposes only.  It should not be relied upon or be construed as advice or applied to any particular set of facts.  If you have a particular issue please take professional advice.