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CoC - LoI , What u Need to Know

CoC - LoI , What u Need to Know

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Published by: b165 on Mar 19, 2010
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09/06/2010

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Michael Curtis, Crown Office Chambers
LETTERS OF INTENT
1.
 
Letters of intent are not confined to the construction and engineeringindustries. However, most of the reported and unreported cases concern thoseindustries and so for convenience the terms ‘Employer’ and ‘Contractor’ areused below.2.
 
In the present context, the term ‘Letter of Intent’ is used to describe a letterfrom the Employer to the Contractor which includes the following elements:a.
 
The Employer indicates an intention to enter into a formal, writtencontract with the Contractor for the Contractor to carry out the work described in the letter of intent.b.
 
The Employer requests the Contractor to start work at once or at anyrate before the parties execute the formal, written contract.3.
 
However, the expression is not a term of art. The term can embrace letterswhich only include element a. above – but if they do, they are unlikely to haveany legal consequences.
 Letters of intent come in all sorts of forms. Some are merely 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 ‘subject tocontract’’ others are contracts falling short of the full-blown contract that iscontemplated; others are in reality that contract in all but name. There cantherefore be no prior assumptions, such as looking to see if words such as‘letter of intent’ have or have not been used. The phrase ‘letter of intent’ isnot a term of art. Its meaning and effect depend on the circumstances of thecase
”.Per HHJ Humphrey Lloyd QC
 ERDC Group Limited v Brunel University
Judgment 29
th
March 2006 (Case Summaries paras 58 to 65)4.
 
Pending the execution of the formal, written contract a Letter of Intentcontaining the two elements identified above will normally take effect in oneof three ways:a.
 
As a request by the Employer to the Contractor which, if actioned bythe Contractor, entitles the Contractor to a restitutionary remedy,namely payment of a reasonable sum (a
quantum meruit 
) for the valueof any work done or any materials supplied.b.
 
As a request by the Employer to the Contractor, which if actioned bythe Contractor, creates an interim contract between the parties on itsown terms. Those terms govern the rights and obligations of theparties pending the execution of the formal written contract.
 
Michael Curtis, Crown Office Chambers
c.
 
As a final contract between the parties incorporating the terms andconditions of the formal, written contract notwithstanding the failure of the parties to execute the formal, written contract.5.
 
For all practical purposes, where the Letter of Intent results in a contract whichincorporates the conditions of the JCT or other standard form referred to in theLetter of Intent, it will make little difference whether the Letter of Intent isanalysed as falling into the second or third of these categories. What mattersis whether the conditions are incorporated or not.6.
 
The categories can therefore be more usefully reclassified as follows:a.
 
As a request by the Employer to the Contractor which, if actioned bythe Contractor, entitles the Contractor to a restitutionary remedy,namely payment of a reasonable sum (a
quantum meruit 
) for the valueof any work done or any materials supplied (Category One)b.
 
A request by the Employer to the Contractor, which, if actioned by theContractor, creates an interim contract between the parties on termsthat fall short of the terms and conditions of the relevant standard form.(Category Two).c.
 
As request by the Employer to the Contractor, which, if actioned by theContractor, creates an interim contract between the parties on most orall of the terms and conditions of the relevant standard form
OR
As a final contract between the parties incorporating the terms andconditions of the formal, written contract notwithstanding the failure of the parties to execute the formal, written contract (Category Three).7.
 
Put more simply, in any case the issues will be these:a.
 
First, was there a contract between the parties?b.
 
Second, if so, what were its terms?8.
 
Q: Why does it matter if there is an interim contract or a final contractincorporating all the terms and conditions or merely a restitutionary right topayment of a reasonable sum?9.
 
A: When one or both of the parties seeks to rely on an express and/or impliedcontract term (whether in the interim contract or the final contract) in order toobtain a remedy (by claim or defence) under that term or for breach of it. Orwhere the contractor thinks that a
quantum meruit 
will reap a better rewardthan his contract rates.10.
 
For example:a.
 
In
 British Steel v Cleveland Bridge
24 BLR 94 (Case Summaries paras1 to 4), Robert Goff J, British Steel claimed the price for goods sold
 
Michael Curtis, Crown Office Chambers
and delivered. Cleveland Bridge sought to set-off a counterclaim fordamages on the basis that British Steel delivered the goods late and outof sequence.b.
 
In
 Durabella Ltd v J Jarvis & Sons Ltd 
(2001) 83 Con LR145 (CaseSummaries paras 16 to 17) Jarvis sought to rely on a ‘pay when paid’clause in Jarvis’s conditions in defence to a claim by Durabella forpayment for work carried out.c.
 
In
 Jarvis Interiors Ltd v Galliard Homes
[2000] BLR 33 (CaseSummaries paras 11 to 14) Galliard sought to rely on an arbitrationagreement when applying for a stay of proceedings brought by Jarvis.d.
 
In
 Mowlem PLC (trading as Mowlem marine) v Stena Line Ports Ltd 
 [2004] EWHC 2206 (Case Summaries paras 39 to 44) the employerrelied on an express term in the letter of intent imposing a ceiling onthe amount the employer would be liable to pay.11.
 
It is therefore important to be able to say which category a Letter of Intentfalls into. In each case the answer will depend on the intention of the parties,which is found by an objective interpretation of:a.
 
The language of the Letter of Intentb.
 
The surrounding circumstances, including anything the parties wrote,said or did subsequent to the Letter of Intent.Category One: Cases where there is no contract and where the Contractor has arestitutionary right for payment of a reasonable sum for the work done and materialssupplied.12.
 
The court prefers to avoid putting a Letter of Intent into Category One at all.13.
 
Where a letter of intent authorises work, materials or services to be providedpending the conclusion of some further agreement and the letter is accepted,the court will try to establish a contract for that which the letter requires sincethat would be consistent with the parties’ presumed expectations. However, acontract cannot exist unless it is clear that, viewed objectively, the parties werein fact agreed on all the matters which they considered necessary and whichare necessary to form a contract:
 Durabella Ltd v J Jarvis & Sons Ltd 
(2001)83 Con LR 145 per HHJ Humphrey Lloyd QC at 150 (Case Summaries paras15 to 17).14.
 
See also:a.
 
Trentham (G Percy) Ltd v Archital Luxfer Ltd 
[1993] L Lloyd’s Rep 25at page 27 (Case Summaries paras 5-8) where Steyn LJ said in an oftenquoted dictum that the fact that a transaction is performed on bothsides will often make it unrealistic to argue that there was no intentionto enter into a contract.

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