In the RICS Construction Journal legal helpline page 27 June-July 2010 is stated that a letter of intent 'should only be used where there are good reasons to start work in advance of concluding the formal contract'. Whilst such circumstances dictate that an urgent agreement between the parties is required, I personally deplore the use of letters of intent and would never advise of their use! Further, I would consider the use of them often to be negligent.
How do I arrive at this opinion? Well, some of those I have seen are devoid of essential terms in any contract such as insurance, change management, (jurisdiction compliant) payment procedures and dispute particulars. They often state what works can be progressed and what the cap is in terms of payment, but that is it. I also struggle to see how a client can ask for a scope of works to be delivered but places a cap on the amount they will pay - what is that all about? What if it genuinely costs more to deliver than is permitted in the cap?
We have at our disposal in the industry cost reimbursable contracts such as the NEC3 Engineering and Construction Contract (ECC), main option E. This contains all the essential terms a contract should contain. Why would you want a half baked letter of intent, or pay for the creation of a bespoke 'adequate' form? What an uncertain and wasteful process that serves only to benefit those that generate an income from it.
A letter of intent was never intended to say 'go' it was merely a letter to state there is an intention to place a contract with the preferred seller. So, it is the combination of insufficient terms and the fact there are standard industry forms available (such as ECC), that form my view that all too often, the use of letters of intent is negligent and actually quite unnecessary.
Focus on agreeing the terms as soon as possible if that is the stumbling block. Lock yourselves in a room until agreement is reached. If the seller commences work without all the terms agreed, even with a letter of intent in place, then the bargaining position is compromised. If emergency works occur, use ECC option E, and focus quickly on the detail of the work scope itself.
I've never advised the use of a letter of intent and never will. I loathe the flippancy of advice clients get to use them. Don't do it. Be professional, advise the use of properly thought out standard cost reimbursable contracts such as ECC Option E if you absolutely have to award today for a part of the scope to be delivered.
That's got that off my chest, any thoughts?!
Rob
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Letters of intent are not rubbish if they are worded in such a way to protect both parties.
ReplyDeleteAlways take professional advice.
I tend to agree with Mr. Gerrard. A letter of intent cannot be the contract.
ReplyDeleteHowever, there is nothing in English law to prevent someone from carrying out work, without any written documentation evidencing the contract, or even agreement on the price to be paid. Whether it would be wise to do so, is another matter, but often the commercial imperative is to get on with the work immediately and "fix up" the paperwork later.
That can be a lot of fun!
Patrick Mooney
LOI is not always rubbish, in business you have to take some very critical decisions. When any one do not have jobs in hand he has to negotiate on LOI. We cannot totally ignore LOI, some time you really need it.
ReplyDeleteRiaz Baig
I would agree with majority of them. LOI could play an important if drafted appropriately for its intended use "allowing the contractor a levy to commence mobilising in short notice". However, i think it would be useful to avoid any financial statements in it unless they are mentioned in correlation with scope of works.
ReplyDeleteIn theory yes they are rubbish.
ReplyDeleteIn the real world they get used with the best intentions and with all contracts its ok until something goes wrong and the Letter of Intent, Early Works Agreement, Advance Work Authorisation, call it whatever comes under the spotlight and suddenly no one is quite sure what they really meant when they were all friends at the start.
Open the chequebook and roll-out the lawyers!
I agree; I wouldn't use them. The time and cost spent drafting letters and the use of the lawyers would be better spent drafting a real contract that adequately describes the scope and detail of the work to be done ahead of the main contract agreement. That way all parties are protected by a set of conditions. It shouldn't be that difficult for the client and contractor to sit down and agree a scope, specification, liabilities and responsibility. How's that for a start on mutual trust and co-operation? If it subsequently all goes wrong with the agreement of the main contract you are left with a contract that has been agreed and can be completed.
ReplyDeleteThe problem is with the name.
ReplyDeleteA letter of intent is a letter that says "I intend to award a contract to you, but am not doing so now".
Then people use it to award a contract. That is crazy.If you want to award an interim contract, do so. Use the ECC short form!
Working to a true letter of intent means you may well have to claim for work done without a contract if you start work. If the document is not a letter of intent but an incomplete contract, you are at risk if you start work without defining key matters (such as insurance, liability, programme); I wonder who might put in an unqualified tender if offered such an ill defined contract.
In either event, the odds are you will end up with a dispute - if only on the manner of incorporating the completed work into the (finally negotiated) contract. I wonder how the guy who agrees to such an arrangement keeps their job when things go wrong.
It is really so easy, as Richard Woodhrad suggests - I wonder why lawyers do not recommend it. If you receive a letter of intent - of either kind - not forming an adequate contract, complete the relevant entries on the short form contract data, send it back, suggest this is what was intended and promise to start work as soon as it is agreed. If you have an argument over this, you know you should not have been prepared to start work as you had a fundamental disagreement over what you were being asked to do.
George thanks for the post. I'VE BEEN SAYING THAT FOREVER. GREAT MINDS THINK ALIKE.
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ReplyDeleteWhy do so called about the letters 'the rubbish' only point I see there, that the circumstances and the situations you puts on to declare about your intentions somewhat considered to be difficult all the way. medical school letter of intent
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