Letters of intent are rubbish!

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

NEC3 Supply Contracts launched

Two additions to the NEC3 family of contracts launched on Thursday 11 February. The NEC3 Supply Contract and NEC3 Supply Short Contract are the first standardised contracts available for supply and purchasing of goods. Like all NEC contracts they are designed to save time and money for all parties by resolving issues before they turn into problems.

These two new documents have already seen significant interest with the entire first print run selling out pre-publication. The contract has been adopted in pre-launch trials and given a resounding endorsement by Meridian Energy – the largest electricity supplier in New Zealand, as well as several big names in the UK.

Want to know more? Take a look at the NEC website at: www.neccontract.com/supply

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