Beware letters of intent, for they are the work of the devil’s pen.
Often, you receive a document headed ‘Letter of Intent’, used in the course of your negotiations, pending the completion and formal execution of a contract. It signifies the sender’s intention to enter into a contract with you at some future date, but in the meantime, you are requested to start work towards fulfilling the obligations of that contract. This is often due to a tight schedule where the finality of the contract would delay the start of the project. The significance of such letters can be seen in the numerous court cases, where they have been held to give rise to no contractual relationships whatsoever and have created binding contracts. The consequent risk to both parties is that they are seldom clear and give rise to the interpretation of the single question: “What did the parties actually intend?” The case of Emcor Drake and Scull Limited v Sir Robert McAlpine Limited is an example of the perils of proceeding with work under a letter of intent. The project concerned the design and construction of new buildings and the refurbishment of an existing hospital as part of a private finance initiative scheme in the West Midlands, UK. McAlpine was the main contractor who appointedEmcor the subcontractor to undertake mechanical and electrical works, which at a value of £34.25m formed a significant part of the whole project. McAlpine and Emcor were in discussion for a year before the price for the works was agreed in principle. It had been the parties’ intention to enter into a formal subcontract in the near future, but about 18 months after Emcorcommenced work on site the parties’ working relations broke down due to disagreements concerning the terms and conditions of the proposed subcontract. In the end, no formal subcontract was executed. Emcor ultimately refused to undertake any further work until a formal subcontract was agreed. McAlpine held Emcor’s actions to be a repudiatory breach, contending that a letter of agreement and a series of work orders constituted an agreement to complete the entire installation. Emcor disagreed, and in its defence argued that its only obligation was to design and install the works instructed by McAlpine pursuant to the series of work orders, each valued at £1m. The Court concluded that there was no subcontract between the parties and accordingly Emcor was not obliged to complete the entire works and not in repudiatory breach. The parties placed little importance on the formalities of a written subcontract prior to Emcor commencing work on site, until disagreement about the terms and conditions resulted in a dispute. One witness remarked: ...the risks inherent in the M and E works...in terms of time and cost...there needed to be clear unequivocal agreement from the outset between the parties as to their respective obligations to avoid later difficulties Final thoughts The parties decided, for whatever good commercial reasons, to start work before the terms of its subcontract had been agreed, on a presumption that ultimately terms would be finalised. This case and countless others demonstrate that letters of intent are notoriously difficult to interpret, thus, potentially leading to conflict and a breakdown in an otherwise healthy working relationship.
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New instructions extending the scope of the original contract should be in writing.
Imagine, you are an M&E sub contractor and you have entered into contract with a contractor. During the works, you carry out additional work following instructions from the contractor. You attempt to extract a written order, but this is not forthcoming. Lo and behold, the contractor refuses to pay you without a written order, and you end up at loggerheads. The only thing you can point to as evidence that you were instructed is a conversation you had with the contractor’s site manager, in which he asked you, and you agreed, to carry out the works. Your contract is so worded that orders in writing are made a condition of any right to additional payment for the extra works. This is what happened to Management Solutions & Professional Consultants Limited who ended up in dispute with Bennett (Electrical) Services Limited. Management Solutions entered into contract with Bennett for electrical installation works in connection with electrical upgrading works for family houses at the RAF base in Colchester. After completion of the works, Management Solutions was left with sums of money which had been applied for, but which remained unpaid. A dispute arose concerning the unpaid sums and Management Solutions started adjudication proceedings claiming payment. The adjudicator decided in favour of Management Solutions and ordered Bennett to pay. Bennett refused. Disgruntled by this, Management Solutions issued court proceedings by way of summary judgment to have the adjudicator’s decision enforced. During the proceedings, it became clear that during the course of the project Bennett orally instructed Management Solutions to undertake certain additional works. Bennett disputed that the instructions had led to the agreed expansion of the scope of works or that the work was additional to the scope of the works. The reasoning behind this was that the contract contained a written variations clause allowing it to add or subtract from the scope of work. Thus, oral instructions fell outside the scope of this clause and the contract. Management Solutions argued that the variations clause allowed the scope of work to be varied within the limits provided for by the clause. Within those limits, the works could be varied. Oral variations were not varying the contract, they were merely instructions issued under the contract and redefined the scope of work. The judge preferred Management Solutions contentions. He said that the variations were carried out under the contract and were within its scope. Even if the variations were oral and not evidenced in writing, the work required by them was carried out and the instructions were given by Bennett. The resulting work was therefore carried out by agreement with the result that the requirement that the variations should be in writing was waived by both parties. Final thoughts The anxiety of the courts to avoid injustice to contractors caused by strict wording requiring an order in writing has led to rationalised reasons enabling contractors to recover without such an order in a number of different ways as this case shows. Nevertheless, a contractor should always ensure that orders are received in writing or evidenced in writing and preferably before committing itself to carry out the work. |
Dr. Andrew MilnerDBEnv, LLM, MSc, BSc, MRICS, MCIArb Archives
February 2023
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