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The Vague Role of Letter of Intent in English Law

The existential nature of ‘Letter of Intent’ (LOI)[1] is to enshrine all that the parties have agreed in the pre-contractual stage[2]. In some form of contracts which negotiation is extensive and complicated, the parties are more willing to sign at least one LOI to discard any ground of further disputes on preliminary agreements or to commence the work[3]. LOI may include a directive on further steps prior to the final contract in order to save time and energy[4]. As far as HHJ Seymour QC was concerned[5] LOI is a mythical beast in the construction industry which imposes responsibility for the payment avoiding the contractual risk. However, the forms LOI is taken and its implications are more than a mere entitlement to the payment. According to Clays and Dennys[6] there are other types of LOI with different effects. So, as a problematic issue[7], there is not a global forum for the substance and implication of LOI. This essay will discuss the various effects of LOI in the following titles: (a) different senses; (b) arisen problems, and (c) problem avoidance methods.

Different Senses

There is not any general assumption of the substance of LOI[8]. As HH Lloyd QC, in ERDC v Brunel University[9], has pointed out ‘[LOI] comes in all sorts of forms. Some are mere expressions of hope; others are firmer but make it clear that no legal consequences ensue; others presage a contract and may be tantamount to an agreement … others are contracts falling short of the full-blown contract that is contemplated; others are in reality that contract in all but name…[10]’. In the realm of the construction, LOI is utilised in some situations to which there is or likely is a general agreement on contract terms or there is a practical necessity to an early implementation of the work[11]. The substance of LOI depends on the court determination[12] of the individual factual matrix[13], and is from an all or nothing spectrum of the existence of an obligatory contract to the gray area of the quasi-contract[14].

The first tier of LOI is the one by which has been knowingly intended by the parties not to create any legal contract[15]. However, as HHJ Coulson in Cunningham v Collett & Farmer[16] has pointed out[17], this is not the common form of LOI in the construction industry. The ambit of LOI, referring to Turiff Construction v Regalia Knitting Mills[18], may be a mere description which echoes the achieved primary agreements to avoid further misunderstanding. In this context and where incompleteness or vagueness in some essential terms preclude the conclusion of the contract[19], LOI is amount to an agreement to agree in the future which is a subsidiary of negotiation. According to HHL Ackner in the decision of House of Lords in Walford v Miles[20], … while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason.[21]’. Hence, a bare agreement to negotiate, under the guise of LOI or any other similar format, does not contain any mandatory obligation to future contract because of the lack of the contractual core “…unless all material terms of the contract are agreed, there is no binding contract…[22]”.

The second sense of the LOI is to create a binding contract[23]. This contract is constituted by express intention of the parties or judicial interpretation of the factual background[24]. As a matter of interpretation, the court would consider the construction of communication and all surrounding circumstances to determine whether all necessary elements of the contract have been concluded[25]. This contract is either temporary or permanent, and by its very nature is either a standing offer which would constitute the unilateral (or if) contract or an ordinary executory contract[26]. The contract for whole work may be formed by way of incorporation of a standard form in pre-contractual relations[27], or meet the precedent conditions which were determined in the LOI[28].  The temporary or preliminary contract[29], which creates limited duties upon its individual terms[30] can be formed by way of the explicit intention of the parties or judicial determination while ‘conclusion of the contract for whole works[31]’ is pending and certain terms are still to be agreed[32]. Therefore, it is visible in many construction cases[33], whenever the parties have agreed on fundamental terms expressly[34] or by conduct[35], especially when they have started the work[36], that courts are more willing to impose the objective test and decide on the existence of the contract[37].

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The third tier of LOI is categorised under the quasi-contract. This is where the parties embark on the work having reliance on the existing LOI as the matrix of promises[38], but essential terms have not yet been sufficiently and definitely concluded[39]. So, in the lack of the contract, quantum meruit is the final remedy to reimburse the aggrieved party. As HHLJ Waller held in Whittle Movers v Hollywood Express[40]if the judge concluded no contract he would have been bound to consider the arguability of a restitution claim[41]. This is the last resort where there was a request to commence the work before concluding the contract and one party knowingly got some benefits in detriment of the other party[42].

Arisen Problems

Lack of certainty over the concept and implication of LOI is a problematic issue because of the unknown risk of non-compliance[43]. It is relying on Kleinwort Benson v Malaysia Mining Corporation Berhad[44] with the presumption that the commercial entities have intention to create legal relations while they enter into an agreement. Therefore, existence of LOI is an indication of a contract which is not necessarily to be proved by positive evidence[45]. This fact may give rise to uncertainty in the contract terms as it puts the fate of LOI before the court to decide on the construction of the contract[46] and its terms. The unperceived characteristic of LOI makes some hazards. First, the parties may lose control over the deal. Second, it may end up to unknown monetary subsequences. Third, LOI may give rise to non-liability for the work carried out.

 First, the vagueness and incompleteness are advantageous and inappropriate windfalls of LOI. Although they keep the hands of the parties open to manoeuvre on in their private relationship[47], it could be out of control wherever the court steps in. However, courts try to find out the real intention of the parties, they apply an objective test to construe that[48]. Hence, the decision of the court is a matter of anxiety for the parties since there is a chance of imposition of an unwanted contract or modification in the mutual assumption of the parties[49]. This can be found in two cases. First, in Harvey Shopfitters v ADI[50], the court imposed an intermediate form of contract in contrast with the assumption of the parties that had been bound by IFC 80 which was referred to in the LOI. Second, in Diamond Build v Clapham Park Homes[51] the court did not accept the argument that JCT, which was proposed in the course of negotiations, had been superseded with the LOI. Furthermore, the most controversial case was and is RTS Flexible Systems v Molkerei Alois Muller[52] where the uncertainty in applicable regime over a LOI is visible in the decisions of TCC, Court of Appeal and Supreme court. Therefore, LOI can be a challenging issue for both parties and the court to construe existence and or imposition of a particular contract and determination of incorporated terms.

The second arisen issue is the inherent feature of restitution which implies recovery, not liability. This is visible in the British steel case[53] where the court ruled on recovery under quantum meruit refusing the counterclaim for liability[54]. However, that decision did not cause injustice because the counterclaim for damages lacked the necessary legal foundation[55]which may end up to injustice in some others. The right to retention of a part of the payment for damages, as HHLJ Stocker held in Crown House Engineering v Amec Projects[56], relying on its very nature is a matter of law of contracts and not as restitution. The beneath argument is that the defendant could have chosen the desired and undesired benefits by contracting, when he did not do so he lost the choice and should accept them both[57]. Furthermore, the recognised right of either party to desert the LOI may give rise to damages which could not recover on the basis of the repudiatory breach and would have additional costs for the client to find a replacement contractor to finish the work[58]. Therefore, the law of restitution may cause a black hole when implying the entitlement of the remuneration and not the liability for damages.

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The third matter is unknown monetary subsequences of LOI in terms of the essence and amount of the payment. First, LOI cannot always guarantee the remuneration under the law of restitution. Nevertheless, the factual background in Regalian Properties v London Docklands Development[59] and Diamond Build v Clapham Park Homes [60] were different, the courts did not recognise any ground for recovery dealt with the fact that in both cases the applicant had carried out the work. Second, lack of contract tempts the opportunistic party to use or abuse the existent deficit to reimburse under the law of restitution, especially when the given price was under the estimate or there was subsequent inflation in costs. The contractor, in ERDC v Brunel University[61], had tendered for £1.238m after having paid £1.266m and brought a semi-successful claim for an additional £0.9m relying on the contractual gaps derived from the expiration of LOI. Hence, LOI may cause some monetary subsequences which jeopardise any prediction of the ultimate remuneration. In some cases, it was not enough basis for reimbursement, whereas in others the final cost was more than what had been tendered.

Problem Avoidance Methods

There are some remedies for arisen disputes from LOI. Basically, any unwilling windfall of LOI can be prevented or managed by the creation of some clues which would put light on the four corners of the mutual intention[62]. However, the wise practitioners would rather avoid any further issue by maximum determination at the drafting stage[63], there are some ways to control the subsequences in the performance stage. It may be a function of what is meant from backward and forward reasoning of the factual background[64]. Thus, a free flow judicial interpretation could be barred prior to signing LOI by determination of intention through exclusion and exemption clauses and designation of bilateral counter responsibilities by utilising standard sort of contract. Moreover, it can be managed in the performance stage by conduct and reliance.

The parties can avoid the creation of any unwanted contract in the pre-contractual stage by manifest expression of their intention[65]. This method rebuts the presumption of intention to create legal relation and ruin the prerequisite of intention as a vital element of the contract. It is a common assumption in negotiating memorandums that parties can preclude the enforcement of preliminary agreements with a ‘subject to contract’ clause[66]. The prima facie, relying on the judgment of HHLJ Neil in Bunker-Smith v Freeza Meat[67], shows that the ‘subject to contract’ clause did not result in a contract. English courts are very reluctant to render a LOI as a contract where there is a subject to contract phrase[68]. In addition, the formation of the contract or giving effect to it wholly or partially may be suspended through ‘subject to …’ clauses which creates a conditional contract[69]. Obviously, before meeting the precedent or subsequent condition, it is not possible to rule on the performance of the contract[70]. Therefore, the ‘subject to…’ clauses are offered to preclude the formation of the contract or to suspend it in order to avoid  arising problems form LOI.

The second available remedy to control the subsequences of LOI is to define expenditure and liability caps through excluding and limiting terms[71]. It is a contractual mechanism which prevents any further responsibilities arisen from or connected to the LOI. Nonetheless, the legal prerequisite is to presume that the LOI has formed a contract[72]. A strong precedent supports this remedy[73] yet a good example of the implication of caps in LOI can be found in Diamond Build v Clapham Park Homes[74]. The court submitted that a LOI had formed a contract containing a cap in which there was not any liability beyond the expressed limitation. Hence, one benefit of the sense that the LOI is a contract is to use caps and other exclusion clauses to control further liabilities.

The best reliable way to control the subsequences of LOI is to use some sort of contract instead of LOI which includes provisions to manage the risks of early project involvements. These contracts minimise the risk of judicial interpretation as they contain semi-comprehensive provisions. There are two types of contracts. Some of which have been designed to manage the pre-construction services like JCT 2016 PCSA which  aims to carry out pre-construction services under a two-stage tender process[75] and JCT 2016 PCSA/SA which embarks on the work before concluding the main contract[76]. Others include some terms for early involvement. NEC 4 option x22, PPC2000 (amended 2013) at appendix 3 part 1 provide with minimum necessary conditions to avoid further disputes.

Reliance is an external standard and the last reasoning shot used to define mutual promises by the courts. Its significance evolves where the parties to LOI have wasted the drafting opportunity to identify their intention, and obviously do not have any control over the wording of the LOI.  Thus, they can control the subsequences by act. Otherwise, act and reliance on the promises are judicial instruments to find a binding contract or quasi-contract through an objective judicial test[77].

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Conclusion

LOI is a problematic instrument which by either way of construction or interpretation may take one of the three senses; non-binding memorandum, binding exclusory or unilateral contract, quasi-contract.

The interference of the courts to identify the nature and effects of LOI give rise to subsequent problems. First, courts identify the substance of LOI through an objective test in which can result to unwilling fruits. Thus, it is not predictable whether the courts recognise the existence of a contract. It may also impose an unwanted contract or change the presumed contract to a new one.  Second, restitutionary recovery is only for the reimbursement of costs and cannot imply any liability. Hence, there is a potential ground to escape from subsequent liabilities. Third, the quantum meruit rule can put any prediction about the final cost in danger and give rise to financial uncertainty.

The above-mentioned problems can be avoided or managed. The parties can explicitly preclude or suspend the creation of a contract in whole or part by ‘subject to contract’ or ‘subject to …’ terms. Another possible remedy is to utilise limitation or exclusion clauses which work as caps. Having a final or more detailed contract is the best controlling approach. JCT 2016 PCSA, JCT 2016 PCSA/SA, NEC 4 and PPC 2000 have been designed (or include some provisions) to regulate the early involvements and can be used to manage the risk of any early commencement of the work. The last resort to avoid further issues is to control the performance of each party in order to prevent promise reliance and reliance as the practical intention.

Bibliography

Books:

Atiyah P & Smith S, Atiyah’s Introduction to the Law of Contracts ( 6th, Clarendon 2009)

Beatson J, Burrows A and Cartwright J, Anson’s Law of Contract (30th, Oxford 2016)

Clay R , Dennys N, Hudson’s Building and Engineering Contracts (13th, Sweet and Maxwell 2015)

Holton A, ‘Letters of Intention in Corporate Negotiations: Using Hostage Exchanges and Legal Uncertainty to Promote Compliance,’ (2014) 162 UPLR, 1237

Furmston M, Norisada T, Poole, J, Contract Formation and Letter of Intent (1st, Wiley & Sons 1998)

Furmston M, Tolhurst G J, Contract Formation (2nd, Oxford 2016)

Furst S and Ramsey V, Keating on Construction contracts (10th, Sweet & Maxwell 2016)

Green N and Naylor D, ‘Recent Developments in Letters of Intent’ (2007) CIB World Building Congress 2007, < https://www.irbnet.de/daten/iconda/CIB5236.pdf> accessed 25 March 2019

Lake R B, Draetta U, Letter of Intent and other Precontractual Documents (1st, Butterworth 1994)

McKendrick E, Contract Law (11th, Palgrave 2015)

Mitchel C, Mitchel P, Waterson S, Goff & Jones; The Law of Unjust Enrichment (18th, Sweet & Maxwell 2011)

Peel E, The Law of Contract (13th, Thompson Reuters 2010)

Poole J, Contract law (13th, Oxford 2016)

 

Websites:

https://www.jctltd.co.uk/product/pre-construction-services-agreement-general-contractor accessed 30 Apr 2019

https://www.jctltd.co.uk/product/pre-construction-services-agreement-specialist accessed 30 Apr 2019


[1] ‘Letter of Intent’ is a generic name to address preliminary agreement which may be appeared under some other varieties of names like: Comfort Letter, Memorandum of Intent, Agreement in Principle, Letter of Understanding, Memorandum of Understanding, Instruction to Proceed, Heads Randum of Intent etc.

[2] Andrew Holton, ‘Letters of Intention in Corporate Negotiations: Using Hostage Exchanges and Legal Uncertainty to Promote Compliance,’ (2014) 162 UPLR, 1237 1257

[3] Dean Naylor and Martin Green, ‘Recent Developments in Letters of Intent’ (2007) CIB World Building Congress 2007, < https://www.irbnet.de/daten/iconda/CIB5236.pdf> accessed 25 March 2019

[4] Michael Furmston, Takao Norisada and Jill Pool, Contract Formation and Letter of Intent (1st, Willey & Sons 1998( 143

[5] Tesco Stores Limited v Costain Construction Limited [2003] EWHC 1487 (TCC)

[6] Robert Clay and Nicholas Dennys, Hudson’s Building and Engineering Contracts (13th, Sweet and Maxwell 2015) 3.049

[7] Jack Beatson, Andrew Burrows and John Cartwright, Anson’s Law of Contract (30th, Oxford 2016) 71

[8]  (n6)

[9] ERDC Group Limited v Brunel University [2006] EWHC 687 (TCC).

[10] Ibid, 27 (HHJ Lloyd QC).

[11] Cunningham v Collet and Farmer [2007] 113 Con LR 142 [90] (HHJ Coulson).

[12] Beatson, Jack, Burrows Andrew & Cartwright John, Anson’s Law of Contract (30th, Oxford 2016) 71.

[13] Vivian Ramsey and Stephen Furst, Keating on Construction contracts (10th, Sweet & Maxwell 2016) 2.010

[14] Turiff Construction and Turiff Ltd v Regalia Knitting Mills (1971) 9 BLR [20] [29] [32] (HHJ Fay QC)

[15] Rose and Frank v Compton & Bros Ltd [1925] AC 445; Rugg & Co Ltd v Street [1962] 1 LLR 364

[16] Cunningham (n11)

[17] ibid [83] (HHJ Coulson)

[18] (n12)

[19] Barbudeu v Eurocom Cable Management Bulgaria [2012] EWCA Civ 548.

[20] Walford v Miles (1992) 2 AC 128.

[21] ibid [138G] (HHL Ackner).

[22] Foley v Classique Coaches [1934] 2 K.B. 1 [13] (HHLJ Maugham).

[23] Robert Clay and Nicholas Denny (n6).

[24] Tesco (n5) 161.

[25] Mowlem Plc v Stena Line Ports [2004] EWHC 2206 (TCC)Damon Compagnia Naviera S.A [1985] 1 WLR 435.

[26]  British Steel Corporation v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504 509 510; Monk Construction Limited (Formerly A. Monk Building and Civil Engineering Limited) v Norwich Union Life Insurance Society 1992 WL 12678673.

[27] Bryen and Langley v Martin Rodney Boston (2004) EWHC 2450; Allen Wilson Shopfitters v Mr Anthony Buckingham (2005) EWHC 1165; Eugena Ltd v Gelande Corp Ltd [2004] EWHC 3273 (QB).

[28] Jack Beatson, Andrew Burrows and John Cartwright, Anson’s Law of Contract (30th, Oxford 2016) 71; Stent Foundation Ltd. v Carillion Construction Ltd. (2000) 78 CLR 188.

[29] British Steel Corporation v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504 [509] (HHJ Goff).

[30] Mowlem Plc v Stena Line Ports [2004] EWHC 2206 (TCC).

[31] (n6).

[32] Gibson v Manchester City Council [1979] 1 WLR 294.

[33] Tesco (n5); Trustees of Ampleforth Abbey Trust v Turner & Townsend Management Ltd [2012] EWHC 2137 (TCC); Turriff Construction Ltd v Regalia Knitting Mills (1971) 9 B.L.R. 20; Ove Arup & Partners International Ltd v Mirant Asia-Pacific Construction (Hong Kong) Ltd (No.2) [2005] EWCA Civ 1585; RTS Flexible Systems v Molkerei Alois Muller GmbH [2010] BLR 337.

[34] WN Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503.

[35] Mitsui Babcock Eng Ltd v John Brown Eng. Ltd (1996) 51 Con LR 129.

[36] G Percy Trentham v Archital Luxifier (1992) 63 BLR 44.

[37] (n4) 243.

[38] British Steel (n29)

[39] Haden Young Ltd v Laing O’Rourke Midlands Ltd [2008] EWHC 1016 (TCC).

[40] Whittle Movers Ltd v Hollywood Express Ltd [2009] EWCA Civ 1189.

[41] Ibid [45] (HHLJ Waller).

[42] Aragona v Alitalia Linee Aeree Italiane SpA [2001] 4 WLUK 232.

[43] Andrew Holton, ‘Letters of Intention in Corporate Negotiations: Using Hostage Exchanges and Legal Uncertainty to Promote Compliance’ (2014) 162 UPLR, 1237 1257.

[44] Kleinwort Benson Limited v Malaysia Mining Corporation Berhad [1989] 1 WLR 379.

[45] Patrick Atiyah and Stephan Smith, Atiyah’s Introduction to the Law of Contracts ( 6th, Clarendon 2009) 100.

[46] Damon Cia Naviera SA v Hapag-Lloyd International SA, The Blankenstein [1985] 1 All ER 475.

[47] Ewan McKendrick, Contract Law (11th, Palgrave 2015) 45.

[48] Michael Furmston and G J Tolhurst, Contract Formation (2nd, Oxford 2016) 1.09.

[49] M P Furmston, Cheshire, Fifoot and Furmston’s Law of Contract (17th, Oxford 2017) 89.

[50] Harvey Shopfitters Ltd v ADI Ltd [2003] EWCA Civ 1757.

[51] Diamond Build Ltd v Clapham Park Homes Ltd [2008] EWHC 1439 (TCC).

[52] RTS Flexible Systems v Molkerei Alois Muller GmbH [2010] BLR 337.

[53] British Steel (n29).

[54] Ralph B.Lake and Ugo Draetta, Letter of Intent and other Precontractual Documents (1st, Butterworth 1994) 112.

[55] (n49) 51.

[56] Crown House Engineering Limited v Amec Projects Limited [1990] 1 WLUK 437.

[57] Charles Mitchel, Paul Mitchel and Steven Waterson, Goff & Jones; The Law of Unjust Enrichment (18th, Sweet & Maxwell 2011) 459.

[58] Emcor Drake & Scull v Sir Robert Mcalpine (2004) All ER(D) 81.

[59] Regalian Properties Plc v London Docklands Development Corp [1995] 1 WLR 212.

[60] Diamond Build Limited v Clapham Park Homes Limited [2008] EWHC 1439 (TCC).

[61] ERDC Group (n9).

[62] (n49) 203.

[63] (n4) 151.

[64] (n4) 242.

[65] (n49) 203.

[66] (n47) 102.

[67] Bunker-Smith v Freeza Meat Ltd [1987] BTLC 20 (HHLJ Neil).

[68] (n48) 94.

[69] PPC 2000 (amended 2013) S. 14: ‘Implementation of the project on site shall commence subject to satisfaction of the following pre-conditions…’.

[70] Diamond Build (n51) [204].

[71] (n45) 100.

[72] (n49) 213.

[73] Mowlem (n26); Eugena Ltd v Gelande Corp Ltd [2004] EWHC 3273 (QB).

[74] Diamond Build (n51).

[77] (n4) 242 3

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