‘Letters of Intent’ have featured in a number of recent cases where an adjudicator’s jurisdiction has been challenged. Mark Ellerington discusses the use of Letters of Intent and looks at the possible effects of the UK government’s proposed adjudication reforms concerning contracts that are not in writing.
Letters of Intent have been used by employers and contractors alike for many years as a means of getting work started quickly whilst the formal contract is sorted. The parties normally intend the Letter of Intent to be a temporary stop-gap only, with the formal contract following soon after. Notwithstanding these good intentions, it is frequently the case that contract documents are executed much later in the project or sometimes not at all.
If there is a fall-out between the parties before they execute a formal contact, the Letter of Intent will inevitably be put under the magnifying glass to decide if there is a contract and typically, what is the basis of payment for work carried out to date. The wording of the Letter of Intent is always important and often inadequately prepared.
It is easy to see why Letters of Intent have been a fertile ground for disputes and why the repeated advice is; (i) if you need to use a Letter of Intent, make sure it is drafted with the utmost care, (ii) if in doubt, seek professional advice and (iii) don’t delay the execution of the formal contract documents.
A further problem that may arise from using a Letter of Intent is exemplified from the UK’s Housing Grants, Construction and Regeneration Act 1996 (‘the Act’) and in particular, whether that Act applies to works performed under a Letter of Intent. If the Act does not apply, then neither does its payment provisions and significantly, there will be no right to statutory adjudication.
The decision on whether the Act and adjudication applies hinges on Section 107 of the Act, which says that it only applies to construction contracts made in writing. Therefore, is a Letter of Intent a construction contract in writing?
STANDARD POSITION
The Court of Appeal in RJT Consulting Engineers v DM Engineering Ltd [2002] reviewed Section 107 and held that, for it to apply, all material terms of the whole contract agreement must be in writing and not just those terms relating to the dispute. Therefore, the Act will not apply if the written contract terms are incomplete or if some further contract terms or contract amendments have been agreed orally.
The RJT Consulting decision means the bar is set high when deciding if a contract agreement passes the Section 107 test and if statutory adjudication is to be allowed.
A Letter of Intent, by its nature, will not often contain all material terms between the parties, therefore it will not satisfy Section 107 of the Act and statutory adjudication will not be available. This standard position was confirmed in two English cases in 2007 regarding Letters of Intent;
Bennett (Electrical) Services Ltd v Inviron Ltd [2007] and Mott MacDonald Limited v London & Regional Properties Limited [2007]. It was held in both cases that the Letter of Intent did not contain all terms in writing to satisfy Section 107 and thus the adjudicator had no jurisdiction.
In Bennett v Inviron, the Letter of Intent referred to a meeting where key contractual issues were discussed including working hours, payment, variations and insurance; however, these matters were not properly recorded in any agreement and as such the Letter failed to satisfy Section 107. In Mott MacDonald v London & Regional, it was held that many of the core contract terms were evidenced by conduct not in writing or were included in documents other than the Letter of Intent. As such, the Letter of Intent also failed to satisfy Section107.
‘Subject to contract’ it is common practice for these words to be used on a Letter of Intent, as they sensibly convey that the letter by itself is not meant to create a binding contract for the full works. The inclusion of ‘subject to contract’ on a Letter of Intent will almost certainly fall short of the Section 107 requirements, thus precluding the Act and losing the right to adjudication. This was confirmed by the Court of Appeal in
Bryen and Langley Ltd v Martin Boston [2005], the Court stating that any reference to suggest that the parties were operating on a ‘subject to contract’ basis would have been fatal to the claimant’s case for a construction contract.
THERE IS ALWAYS AN EXCEPTION
As lawyers often point out, all cases turn on their own facts and as such there is an exception to the standard position regarding Letters of Intent falling outside the Act. This is where the Letter of Intent is complete and confirms the parties’ agreement of all essential terms, which occurred in another 2007 case, that of Harris Calnan Construction Co Ltd v Ridgewood (Kensington) Ltd [2007].
Again, this case was a challenge to an adjudicator’s jurisdiction where the parties’ agreement was in a Letter of Intent. However, unlike the earlier cases of Bennett and Mott MacDonald, it was decided in Harris Calnan that the adjudicator did have jurisdiction to act. In this case the Letter of Intent made plain that the parties were in complete agreement regarding such matters as workscope, price, the JCT contract terms, retention, contract period and liquidated damages. The adjudicator noted that “there appears to be nothing left for the parties to agree” and all that was missing was a set of documents which made the agreement more formal. The Judge agreed that the intention to execute formal contract documents in the future did not mean the parties were not in contract with each other. All the terms were evidenced in writing and the adjudicator, therefore, had jurisdiction. The Court of Appeal stated; “The mere fact that two parties propose that their agreement should be contained in a formal contract to be drawn and signed in the future does not preclude the conclusion that they have already informally contractually committed themselves on exactly the same terms”
Therefore, a court is likely to decide that a Letter of Intent has created a binding contract; (i) only where it is clear there are no further terms to be agreed, (ii) provided the Letter is not “subject to contract” and (iii) if all that remains is for the formal contract documents to be executed. In such circumstances, the Act will apply to the Letter of Intent and adjudication will be available.
THE FUTURE
In Bennett v Inviron [2007], the Judge expressed concern that the Act’s requirement for full written contracts could prevent some sub contractors and smaller projects from having access to the benefits of adjudication. He said this requirement; “….could have the effect of excluding from the scheme a significant number of those whom the Act was perhaps intended to assist”. In particular excluding disputes at; “subcontractor level where cash flow difficulties are likely to be encountered in the smaller projects” and where “the paperwork is rarely comprehensive” These concerns reflect the government’s proposed changes to the Act that were issued in June 2007 by the DTI’s 2nd consultation paper on improving payment practices.
One of the DTI’s June 2007 proposals is to scrap the current restriction (in Section 107) that the Act only applies to contracts in writing. Instead, the DTI proposes to extend the application of the Act, and thus adjudication, to oral and partly oral contracts. If implemented, it is possible that this DTI change may result in more Letters of Intent being covered by the Act and therefore accessible to adjudication.
The DTI says that large numbers of construction contracts contain orally agreed terms and that the difficulty of agreeing a full written contract has acted as a barrier to the referral of some disputes. The DTI says its proposed change would give wider access to adjudication and reduce the number of jurisdiction challenges, which it says are reducing the effectiveness of adjudication and increasing costs to the industry.
If this proposed change is implemented, it remains to be seen whether the numbers and costs of jurisdiction challenges, regarding the contract not being in writing, will be replaced by increased adjudication time and costs, arising from having to decide the terms of the oral, or partly-oral, contract.
Many adjudications are currently conducted on a documents-only basis without the need for an oral ‘hearing”. The DTI’s change, if implemented, could see an increased number of adjudication “hearings” needed to determine the contract terms, placing more time pressure on the adjudication timetable.
This time pressure dilemma was recognised by the Court of Appeal in RJT Consulting when commenting on Section 107 and the need for contracts to be in writing because it provides certainty. Certainty is all the more important when adjudication is envisaged to have to take place under a demanding timetable. The adjudicator has to start with some certainty as to what the terms of the contract are”.
The DTI’s proposed changes to the Act, therefore, have to strike a difficult balance between allowing wider access to adjudication, whilst at the same time ensuring that the adjudication process remains workable within the given timetable.
Mark Ellerington is based at Trett Consulting’s Leeds office.
Since this article was drafted, the Government has now confirmed its intentions to amend the Construction Act by way of its draft Community, Empowerment, Housing and Economic Regeneration Bill within the 2008/09 draft legislative programme. For a detailed commentary of that proposed Bill, and particularly its likely impact upon oral contracts and adjudication, see the enclosed article on page 12 headed; ‘Reform of the Construction Act’ by Hamish Lal.
If the assumed reforms are passed, it seems the Construction Act will now apply to contracts in writing and those agreed or varied orally by the parties. It will be interesting to see if this results in more adjudications being permitted under a letter of intent where some contract terms have, or (here is the tricky bit) are alleged to have, been agreed orally?