Letters of intent: an irresistible temptation

Author: Gillian Birkby

Oscar Wilde once wrote, “I can resist everything except temptation”. Not a direct quote from Mr Wilde on the importance of a signed construction contract, but it does perhaps explain the continued trend for developers and their contractors to start work quickly under the vagaries of a letter of intent (despite previous salutary tales(1)).

A letter of intent has caused a problem yet again: a main contractor, constructing a large warehouse and wine bottling plant on the outskirts of Bristol, engaged a subcontractor under a letter which provided for the construction of floor slabs. The main contractor was authorising the subcontractor to proceed with “all works necessary to enable you to achieve the Design Programme and Construction Programme” and obliged the subcontractor to carry out these works “in accordance” with the documents referred to in the letter. The parties planned to enter into a formal subcontract, but did not get round to it. The parties then proceeded to fall out.

The main contractor said the floor slabs were defectively constructed. Thereafter, extensive (and expensive) testing of the warehouse floor followed. The main contractor tried to recover the costs of these tests via an adjudication. The subcontractor disagreed with the way the main contractor had gone about its referral of the dispute and made its own application to court for an injunction to restrain the main contractor from pursuing the action.

The main contractor argued that the letter incorporated a number of terms set out in documents in an appendix to the letter; the subcontractor was effectively bound by all such terms save to the extent that a term was inconsistent with an express provision of the letter. The main contractor said its request to appoint an adjudicator was in line with these conditions. The subcontractor said that no such terms were incorporated into the letter.

The court held that the letter was a free-standing contract. The subcontractor had to carry out the works “in accordance with” the terms of the documents in the appendix, but secondary obligations were not incorporated. Adjudication was one of these secondary obligations. The main contractor was unable to show that the way in which it had gone about the adjudication was in accordance with the letter, or otherwise establish that the subcontractor agreed to it. The court therefore granted an injunction to restrain the adjudication from proceeding any further.

This tale emphasises (again) the risks in not fully clarifying the relationship between parties to a construction contract. Here, the main contractor believed terms had been incorporated almost wholesale from one document into another, however the documentation itself was unclear and the court found against the main contractor. A shortcut is always tempting but with it come dangers which can be easily avoided. Taking the extra time to enter into a formal contract is worth it in the long run and offers much greater protection.

(1) ‘Letters of intent’ article – 25 February 2013

Gillian Birkby, Head of Construction, Fladgate LLP

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