Legal Comment

Kensington Swan Comment: Letters of what intent?

letter of what intent? letter of intent

Construction works often begin under a letter of intent when a contract is yet to be finalised. The legal status of a letter of intent is uncertain, especially where there is a time lag between the letter of intent and the final contract.

Anchor 2020 Limited v Midas Construction Limited

In a recent UK case, Anchor 2020 Limited v Midas Construction Limited [2019] EWHC 435 (TCC), there was a final account dispute between the Principal, Anchor 2020 Limited (Anchor), and the Contractor, Midas Construction Ltd (Midas). The dispute related to a retirement community built under the JCT Design and Build Contract (2011) edition in Yateley, Hampshire.

The parties were unable to agree on contract terms before the work began. This meant the work was initially performed under numerous letters of intent. The last letter of intent expired on 30 June 2014.

On 21 July 2014, a signed set of the JCT Contract documents were sent to Anchor by Midas. Midas had also signed the appendices to the Contract although these weren’t given to Anchor until 29 July 2014. Importantly, Midas had included a risk register in an appendix without communicating this to Anchor. Anchor did not sign the Contract as they rejected the inclusion of the risk register as a contract document.

The primary issue was whether a contract had been entered into by both parties on 21 July 2014.

Following correspondence between the two parties, Midas eventually took the position that they had presented an offer to Anchor including the risk register on 21 July 2014. According to Midas there was no binding contract as Anchor rejected the inclusion of the risk register. Midas believed this rejection to be a counter offer and meant Anchor rejected its original offer. Midas believed it should be compensated for the work done despite there being no contract. This is what is known as quantum meruit.

Anchor’s position was that the contract became binding on the parties on 21 July 2014 when Midas returned the signed documents. Anchor believed this constituted Midas’ acceptance of Anchor’s offer.

Legal principles

In his judgment, Waksman J considered the leading UK case on contract formation, RTS v Molkerei [2010] UKSC 14 (which also concerned letters of intent), where the Court set out the general principle as: whether a legally binding contract exists will depend on what the parties agreed rather than their subjective state of mind.

It also takes into account their communication, by words or conduct, and whether that leads, objectively, to the conclusion that they intended to create legal relations and had agreed on all essential terms as regarded by them or the law.

It was noted that even if certain terms of economic or other significance have not been finalised, an objective appraisal of the party’s communication may lead to the conclusion that they did not intend agreement of such terms to be a condition for the formation of a legally binding agreement.

While letters of intent are often useful tools (and common) to commence works where a contract has not been agreed by the parties,

they should not be viewed as an adequate substitute to a legally binding contract.

The Supreme Court in RTS ultimately said that a clause requiring the signature of both parties had been effectively waived by the party’s conduct.

Also mentioned was Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 where two alternative scenarios in relation to a proposed contract that has not been formalised are:

• The parties may have reached agreement on all the terms of the proposed contract but still intend that it not be binding until a further condition is fulfilled.

• Alternatively, the parties may be yet to reach agreement on terms but intend that a binding contract exists. If these terms cannot be agreed upon, the existing contract will not become invalid. There are conditions, however, where the failure to agree on certain terms means the contract becomes unworkable.

The Judge in Anchor, Waksman J, concluded that the question always comes down to whether the parties have agreed all of the relevant contractual terms as they are generally considered to exist.

What was decided by the Court in Anchor?

Waksman J did not agree with Midas’ view that the inclusion of the risk register amounted to a counter-offer. In his judgment, Waksman J said that the parties had agreed on all the matters which they, or the law, regarded as essential.

Waksman J stated that if Midas did not think that it was bound after 21 July 2014 then it would not have continued the works. However, it did carry on the work and Waksman J believed this carried “significant weight”. Another factor in the decision was Midas’ continued insistence of a contract.

It was found that both parties intended to be bound on 21 July 2014 and that a contract was formed on this date. It was also found that the risk register was not part of the contract. Certain correspondence between the parties and the nature of the risk register itself did not lead the Court to believe that the risk register was a contract document.

The finding that a contract had been formed meant that the need to analyse the issue of payment on a quantum meruit basis became unnecessary.

However, Waksman J offered some guidance on this issue. He considered because there had initially been a contractual arrangement, the letters of intent, the parties should be paid based on the JCT payment terms of the generally accepted, albeit unsigned, contract rather than on a non-contractual cost-plus basis.

Key takeaways for contractors

It is apparent from this case that courts will focus on the objective intention of the parties rather than their subjective intention when deciding whether they intended to be bound by the contract.

Where one party hasn’t signed, this will not necessarily mean there is no contract, even in the presence of a ‘no contract until signed’ clause as seen in the RTS case.

While letters of intent are often useful tools (and common) to commence works where a contract has not been agreed by the parties, they should not be viewed as an adequate substitute to a legally binding contract.

When there is a delay in time between a letter of intent and a binding contract, it may be difficult to determine what contractual terms would apply. This application would be especially difficult if the letter of intent and the eventual signed contract contain materially different terms.

Deciding whether terms included after a letter of intent form part of the contract could be done by the court on the basis of whether there appears to be a binding contract rather than on an analysis of whether the parties intended to be bound by the extra terms.

This demonstrates the importance of making sure contractors ensure their actions with regards to any inclusions reflect their intention.

If no binding contract exists, it would be wise for contractors to consider their conduct and whether this would give rise to the impression that a contract has been formed.

Performance of the works under a letter of intent, as if a contract is in place, may amount to evidence of the existence of a binding contract despite the fact it is still unsigned. Contractors should exercise caution and ensure a signed contract is in place before they undertake works.

This will avoid any uncertainty over proposed contract terms.

Kensington Swan offers 15 minutes of free advice on construction issues to CCNZ members.

This article was first published in the September 2019 issue of Contractor Magazine

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