A recent case highlights some potential pitfalls of using a letter of intent.
OD Developments v Oak Dry Lining Ltd  EWHC 2854 (TCC) (02 April 2020)
It is not an unusual scenario – the parties are in a hurry to get on with the works and haven’t got time to fully negotiate and enter into a detailed contract based on a standard form, so they decide to get things started based on a letter of intent (LOI). There is no problem with that – is there?
In this case, the main contractor and subcontractor agreed an LOI which stated that the parties would enter into a JCT Design & Build Contract (JCT D&B contract), but they never got around to entering into it, and therefore proceeded instead with the LOI. All went well until a dispute arose with the subcontractor’s application for payment number 21. The subcontractor referred the dispute to adjudication and the adjudicator decided:
- the terms of the JCT D&B contract were incorporated into the LOI;
- the main contractor’s final payment notice was invalid; and
- the subcontractor was awarded £431k.
The main contractor challenged the adjudicator’s decision, stating that he had been wrongly appointed and so lacked jurisdiction. The subcontractor made a cross-application for summary judgment.
The judge, Waksman J, carried out a careful analysis and decided that the JCT D&B contract was not incorporated into the LOI. Accordingly, the adjudicator had proceeded on the wrong contractual basis and did not have jurisdiction.
The legal effect of an LOI depends on its terms and conditions. Seek legal advice if entering into an LOI otherwise, you may find that you do not have the rights and remedies which you expect and require.
Over the years, there have been many reported cases concerning disputes arising under LOIs. Don’t be one of them. Take legal advice and enter into the contract as soon as possible. If you really don’t have time to negotiate all the contract terms before work starts, then make sure you do not lose the impetus for finalising the contract even though work has started. In this case, a dispute arose at payment application 21 – so the parties had ample time to put the contract in place but lost the motivation for doing so once they had signed an LOI.
Trying to save money by not taking legal advice, for example in relation to an LOI, can prove to be much more expensive if it leads to disputes, as in this case. Yet again, it is better to spend the time and money at the beginning of the project to get the correct documentation in place so that your rights are properly set out and you are protected in the way you expect.