Incentives and limits in letters of intent: are they worth the paper they’re written on?

• Author: Sarah J.V. Fox
• Position: Department of Law, University of Salford, Salford, UK
• Pages: 214-232

Incentives and limits in letters of

intent: are they worth the paper

they’re written on?

Sarah J.V. Fox

Department of Law, University of Salford, Salford, UK

Abstract

Purpose – The purpose of this paper is to review the extensive case law in England and

Wales on contractually binding letters of intent. The research focused on discovering whether the

limits commonly found in binding letters of intent were upheld by the courts and so were

effective in practice. It also reviews whether these limits are, as presumed by drafters, sufcient to

act as incentives to the parties to conclude the full contract. The paper uses case law to analyse

and evaluate the legal and business efcacy of these limits and incentives. It considers the

rationale for such limits and incentives before drawing its conclusions and making

recommendations.

Design/methodology/approach – The paper draws on cases in England and Wales to

analyse the judicial interpretation of binding letters of intent. The author has adopted a black letter

approach to this subject by focusing almost exclusively on primary sources. As there is no relevant

legislation in England and Wales, the primary sources are case law. A limited literature review was

adopted, as there is little commentary on this aspect of letters of intent and to ensure the

paper’s originality. The paper also considers papers published by the Society for Construction

Law.

Findings – The paper demonstrates that even if the drafting of the letter of intent is clear, it is the

conduct of the parties after a letter of intent which prevents the stated limits on work times or cost

applying, and undermines these limits in their roles as incentives intended to persuade the parties to

conclude the full contract for the project. The terms of the letter of intent are easily ousted and may not

be strictly enforced by the courts when a dispute arises.

Practical implications – The paper concludes with recommendations for ensuring the terms of the

commonly used letters of intent provide more effective limits on the liability for the employer while

giving the constructor the incentive to continue negotiating and concluding a formal contract for the

works. The paper also recommends changes to the guidance to be given to users of standard form letters

of intent to improve their efcacy as limited contracts.

Originality/value – The analysis of the cases is instructive and the recommendations provide

valuable pointers for those who draft, review or agree letters of intent. The issues that are dealt with

relate to how the parties can be incentivised through clear drafting to execute a more comprehensive

contract for the project.

Keywords Incentives, Case law, Construction law, Letters of intent, Limits on liability,

Contractually binding

Paper type General review

Excellence is never an accident. It is always the result of high intention, sincere effort, and

intelligent execution; it represents the wise choice of many alternatives – choice, not chance,

determines your destiny.

(Aristotle)

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1756-1450.htm

IJLBE

6,3

214

International Journal of Law in the

Built Environment

Vol. 6 No. 3, 2014

pp. 214-232

© Emerald Group Publishing Limited

1756-1450

DOI 10.1108/IJLBE-02-2013-0005

Introduction

Excellence in construction requires that every stage of the process combines high

intention, sincere effort and intelligent execution: from building the project brief and

unlocking the right strategy to investigating, interpreting and incorporating relevant

contractual provisions into the project documentation, then project delivery and

de-brief.

Although most employers start the procurement process with the best intentions,

going to great lengths, in their invitation to tender, to specify exactly the contract terms

that will govern their relationships, many projects start on-site based on a scrap of

paper: the ubiquitous “letter of intent”.

The industry approach to letters of intent is neatly summed up in the 2012

Ampleforth Abbey Trust v. Turner & Townsend case. The project team had accepted

that:

[…] in view of the perceived importance of achieving early completion and, specically, early

commencement of the works, [the consultant considered] it was acceptable to advise

commencing them under a letter of intent rather than waiting until a formal building contract

could be executed[1].

Letters of intent are used with alarming frequency, despite many other judicial

warnings against them. The resulting contracts are determined by chance, not wise

choices. Excellence is side-stepped in the interests of haste.

What matters in a letter of intent?

The difculty faced by most users of letter of intent is that they are proposed, negotiated

and entered into during a urry of pre-commencement activities. There is little time to

assess their worth or relevance to the project. The mere fact that they are common

practice should not detract from the need for users to make informed decisions about

them.

Certain critical aspects of a letter of intent should be carefully considered by all users,

including:

• whether a letter is appropriate in the circumstances – does it actually meet the

project brief and strategy? What are its advantages and disadvantages for the

employer? In Cunningham & Ors v. Collett & Farmer [2006] EWHC 1771

(TCC),[90], the judge held that a careful letter of intent is appropriate “if the

employer wants the work to start on-site promptly and the contractor is also keen

to commence work”, provided essential elements are agreed;

• The risks for both parties inherent in its use – these risks are concentrated on the

person issuing the letter of intent (McGuinness, 1997);

[1] Ampleforth Abbey Trust v. Turner & Townsend Project Management Ltd [2012] EWHC

2137 (TCC), [78]. The court held that the consultant was not in breach of its duties when it

advised the employer to commence the works under a letter of intent. It was their failure to

conclude a contract including full terms, particularly those relating to LADs for delay that

was in breach of the duty to exercise reasonable skill and care.

215

Incentives and

limits in letters

of intent