6 April 2005
There have been two recent decisions in England in the cases of Eugena Limited v Gelande Corporation Limited and Emcor Drake & Scull Ltd v Sir Robert McAlpine Ltd which illustrate, again, the potential pitfalls of parties allowing works to commence on site before concluding a contract and relying on letters of intent as a short term solution.
Employers often find that it is not commercially practical to delay the commencement of works until the terms of a contract have finally been concluded with a contractor. Often, employers choose to proceed on the basis of a letter of intent which is intended to govern the relationship between the parties until a formal contract has been concluded. "Letter of Intent" is not, however, a legally defined term and the legal effect of a letter of intent will vary widely depending on its contents. Such a letter may or may not create a binding contract between the parties but even if a contract is created, often the effects of the letter are not those which were anticipated by at least one of the parties.
Whether or not a letter of intent creates a binding contract will be determined on its own facts and will depend on the parties' conduct and the application of legal principles governing the creation of contracts. Some useful guidance was given by the Court of Appeal in the case of Harvey Shop Fitters Limited v ADI Limited. In this case, works had begun under a letter of intent which provided that if a contract was not subsequently "formalized", payment would be made on a quantum meruit basis. The works proceeded, but no formal contract document was prepared or signed. The Contractor therefore claimed payment on a quantum meruit basis.
The Court of Appeal, however, held that the parties had agreed all the terms of the contract and that the works proceeded on the basis of those terms. Accordingly, even though a formal contract document had not been signed by the parties, the Court held that a binding contract had been concluded between the parties and the contractor was not entitled to receive a quantum meruit.
The two recent cases referred to above illustrate the dangerous and uncertain position that can be created by the use of poorly drafted letters of intent. In Eugena Limited v Gelande Corporation Limited (unreported and heard in October 2004), the Claimant building contractor responded to an invitation to tender and negotiations began on the basis that the JCT Minor Works 98 contract would be used. However, in order to get the Works started, the Defendant sent the Claimant a letter of intent and paid a deposit of GBP40,000. The letter of intent authorized the Claimant to carry out works up to a value of GBP50,000 while the detailed provisions of the contract were negotiated. The Claimant, however, became impatient and demanded that the contract be signed before any more work was carried out. Following a meeting between the Claimant and the Defendant, it was agreed that the Claimant would stop Works on site. The Claimant then issued a demand for payment for approximately GBP76,000 which the Defendant refused to pay.
The Court held that a contract had been concluded by the parties for works up to GBP50,000 and that the contract had incorporated the JCT Minor Works 98 form. However, in respect of works which were completed outside the scope of the Contract, the Claimant was not entitled to receive payment since there was no contractual basis on which the Claimant could recover the monies. It was also held that the Claimant was not entitled to recover money on a quantum meruit basis as the Contractor could not show that he had a reasonable expectation of being paid, which is a requirement for recovery of a quantum meruit.
In the decision of the Court of Appeal in Emcor Drake & Scull Ltd v Sir Robert McAlpine Ltd, the sub contractor in that case vacated the site when works worth GBP34 million had been commenced on the basis of an agreement to enter into a form of sub contract at a later date. The issue in dispute was whether the sub contractor had a contractual duty to complete the whole of the works or whether it was obliged merely to design, procure and execute site works which had been instructed by the main contractor pursuant to a number of separate works orders. The Court of Appeal confirmed that as a formal sub contract had not been agreed, the sub contractor was under no obligation to finish the whole of the works and that the sub contractor was entitled to receive a quantum meruit for the works performed up to the cap contained in each of the main contractor's works orders. It was held that the main contractor was not entitled to recover the considerable costs which had been incurred in replacing the sub contractor following its cessation of works on site.
The decisions in Eugena and Emcor Drake & Scull demonstrate again the importance of parties concluding in clear and unequivocal terms the contract which is to govern their relationship. A letter of intent, depending on its terms, may or may not give rise to a binding contract and unless the letter of intent is well drafted and precise, the parties may well be in a position of great contractual uncertainty until such time as a formal contract is executed, if at all. If it is not possible for the parties to negotiate and execute a formal contract prior to the commencement of works on site, any letter of intent used to authorise the commencement of works should be carefully drafted and address the respective contractual positions of the parties if a formal contract is not subsequently concluded.
Letters Of Intent - Duties Of Consultants When Advising Their Use (26 Mar 2007)
Letters Of Intent - Yet Another Lesson! (29 Jan 2007)
For further information, please contact:
Name: Kevin R. Owen
Phone: +852 2843 4408
Fax: +852 2103 5078