Simon Lewis, a partner in the Construction and Engineering Team at Bond Dickinson, providers of the FIS Legal Helpline, outlines the importance for subcontractors of paying careful attention to the contents of any letter of intent.
Once a contract has been won, there is, inevitably, a conflict between pressure to get on with the job and the need to make sure the contract is clear and in place. This can lead to parties failing to get the contract sorted out before they actually start work. If things go to plan, there is rarely any issue. If, however, there are arguments, then the clarity of the contract becomes important.
One of the ways that this conflict between time and clarity is addressed is in the production of what are called letters of intent. Usually, the contractor wants some work to be carried out before the formal contract or subcontract has been agreed. Further up the line, there may be pressure on the employer to commence works before a certain date: there may be tax-related reasons, the employer may want the contractor to hold its price or may be concluding negotiations with a third party, or there may be long lead-in periods for the ordering of materials. Further down the line, subcontract terms may not be in place and a delay up the line means that the contractor finds itself in the same position with its subcontractors, so it falls back on the same solution.
The problem is that, legally, the term ‘letter of intent’ doesn’t actually mean anything specific. Precisely what effect the letter of intent has depends entirely upon what it says and therefore understanding it will mean reading it very carefully to see what liabilities it is trying to impose. At one end of the spectrum, a letter will have no legal or contractual effect at all and will be not much more than a comfort letter. Then there are letters that give rise to a request to carry out work in anticipation of a full contract being agreed. This might be enough to create a simple contract with limited scope but precisely what the terms of that contract are will depend on what the letter contains. At the other end of the scale, a letter may contain all the things required to form a full contract which covers the whole job, though such letters are perhaps more rare and may not have been intended to have that effect.
If you receive a letter from a contractor asking you to commence work, read it carefully and consider the following:
- Is there an obligation to award the subcontract to you?
- Is there a maximum amount of work stated in the letter?
- Is there a timescale within which the work is to be carried out?
- Are there other provisions dealing with, for example, insurance, terms of payment, adjudication and so on which would be the sort of things you would expect to see in a full contract?
- Are the works to be carried out clearly described?
- Is there any indication that the subcontract, when it is awarded, will supersede the letter?
You will not be surprised to know that there are a large number of cases about letters of intent since each one has to be looked at on its own terms to decide what it means. In some cases, the letter has no binding effect at all; in others, it might as well be the full contract.
The practical point is that you may receive a communication from the contractor which calls itself a letter of intent, but this of itself means nothing: read the letter very carefully and decide what it is you are being asked to do. Is it the case that once you have carried out the work under the letter you may not, in fact, be employed under the subcontract after that? Are the payment terms, scope of work and the timescale clear? Is there a cap on the amount of work you are supposed to carry out? If there is, bear this in mind because getting paid for carrying out work beyond the scope set out in the letter of intent without the contractor’s agreement will be difficult.
Being asked to agree to a letter of intent is not, of course, a sign that there is anything wrong with the job. They are commonly used but nevertheless can still cause problems for the unwary. The important point is to understand what you are, and are not, agreeing to do.