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

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