Starting out with clear intentions – the latest on letters of intent


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A version of this article was published in Construction News on 13 June 2014

“As with so many things, the simplest solution is often the best”; so said the judge in the recent case of Twintec v Volkerfitzpatrick when trying to decipher the terms of a letter of intent. Whilst the nuances of letters of intent have been discussed at length for many years, the basic requirements for a letter of intent to create binding obligations are indeed straightforward – it must include:

  • a commencement date
  • a requirement to proceed with works or services
  • a completion date
  • an overall contract sum
  • an undertaking to pay reasonable costs in the interim

These could be expressed in many different ways but provided you can tick off all five then the chances are you’ve got a binding agreement.

So why do disputes about letters of intent remain so prolific? More often than not it is because they stray beyond these basic points into more complex territory.

For example, what is the effect of the parties attaching a draft contract? This is common in practice, usually because the parties want to record the progress of their negotiations or to apply certain terms while others are being negotiated. The theory is sound, but the consequences are not always clear when put into practice.

This was the issue in the Twintec case. The letter attached a draft subcontract (in this case a DOM/2 form) with a statement that the works should be performed in accordance with those terms except where they conflicted with specific terms of the letter.

There was no dispute that the letter of intent was binding; it clearly fulfilled the five basic criteria. But did this mean that the DOM/2 terms were also binding? They were not, but as is so often the case, it turned on the exact words used.

Twintec was only required to perform the works to achieve the programme “in accordance with” the DOM/2 terms – no more, no less. The judge considered this to mean that Twintec was only bound by terms directly relevant to doing the work in the required time, not other obligations which are secondary to that purpose e.g. insurance requirements or complying with an indemnity. The DOM/2 adjudication provisions were also considered secondary and the attempt to refer a dispute under them failed.

This distinction is interesting for a number of reasons:

  • The judge recognised that it might be “superficially attractive” as a way of making sense of the letter, but that it was “overcomplicated and would produce uncertainty” – I am inclined to agree.
  • One reason the DOM/2 was found not to apply in full was the confirmation in the letter that the parties are “not yet in a position to enter into this Sub-contract”. Parties often include this type of statement to avoid inadvertently slipping into the full contract, but are they aware that it could have wider implications if they later want to rely on a term in the draft contract?
  • Once the full contract is agreed it usually takes effect retrospectively – either because the letter of intent says so, or it is implied. You may then find yourself in breach of “secondary” terms that did not apply at the time when working under the letter of intent. The reality is that unless you are confident that you will negotiate draft terms out, you need to follow them as if they do apply to avoid falling foul later on.

The outcome in the Twintec case would almost certainly have been different if the letter of intent were phrased differently. More importantly however, Twintec is a reminder to avoid the temptation to annex every conceivable piece of paper to a letter of intent assuming it will protect your position – you could simply be adding confusion. If there are terms that you want to apply to an agreement, say what they are and you are more likely to get what you bargained for.

David Weare, Partner, Fladgate LLP (dweare@fladgate.com)

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