Letters of intent are commonly utilised in the construction industry to cover pre-existing negotiations however difficulties arise when formal contracts are not entered into and work has been carried out by one party in reliance on the letter of intent1. This often becomes…
The leading decision in this area is British Steel Corporation v Cleveland Bridge & Engineering Co Limited3where it was held that that where work was undertaken pursuant to a letter of intent, in most cases it would not matter whether the formal contract was concluded. If the parties had acted on the letter of intent, then payments claim would due on a quantum meruit basis under restitution4. However, the inherent difficulty with a letter of intent is where a party is seeking to claim damages for breach of contract and it is argued that no contract is entered into. Accordingly, the issue of whether a contract is in existence is vital. Moreover, if there is no contract, it begs the question as to what sums the CCL is entitled to under quantum meruit principles.
In British Steel, it was held that the letter of intent covered pre-contractual negotiations and as no terms had actually been agreed, there was no binding contract. Therefore, the extent to which a contractor can rely on the letter of intent to enforce their rights will inherently be dependent on what terms are agreed to in the letter of intent itself. In the British Steel case for example, it was evident that issues pertaining to price, delivery dates and the applicable terms and conditions had not been agreed. As such, the Court concluded that there was simply an obligation upon Cleveland to pay a reasonable sum for such work as had been done pursuant to its request contained in the letter of intent on a quantum meruit basis.
The general rule as highlighted in Turriff Construction Limited v Regalia Knitting Mills5 is that a letter of intent will be of no contractual effect and that a letter of intent is “no more than an expression in writing of a party’s intention to enter into a contract at a future date. Save in exceptional circumstances, it can have ...
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