| Date | 4 June 1997 |
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| Judgment | VHE Construction v Alfred McAlpine Construction ORB (Unreported), 14th April 1997 |
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| The Issue | The use of letters of intent and whether precontract negotiations can assist in determining the existence of a contract. |
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| Implication |
A letter of intent may or may not give rise to liability depending upon the facts of the case. Evidence concerning negotiations between the parties may assist to determine whether a contract has been made, but will generally not be permitted to construe its terms. |
printLetters of intent are widely used in the construction industry and practitioners often like to express fairly polarised views as to whether such documents can bind the parties to any liability. The reality is, as in all things concerned with the law, it is not quite as simple as that. As always it is a question upon the facts of each case whether the sending of a letter of intent can give rise to any, and if so, what liability. A letter of intent ordinarily expresses an intention to enter into a contract at a future date but creates no liability in regard to that future contract. Depending upon the contents of the letter and the factual background to it, it may be construed as having no binding effect. This has been the salutary lesson that many construction firms have experienced having carried out extensive construction works following the issue of a letter of intent. In British Steel v Cleveland Bridge, the supplier of steel castings was held entitled to a reasonable sum for the work carried out, but not liable for delays or short supply since no contract had been formed which could be said to define the scope of works in their entirety. Similar findings were held in the 1989 case of Kitsons Insulation v Balfour Beatty. Balfour were main contractor for the White City development for the BBC and had sent a letter of intent to Kitsons for the design, manufacture, supply and installation of modular toilet units. Exchanges occurred concerning the subcontract form, but in the final analysis the court held that no contract had been concluded as the parties had not arrived at the stage where it could be said that full agreement had been reached between them. It was considered that the matters outstanding, in particular the method of payment, were too significant for a contract to come into place. The far reaching consequence of this were that the subcontractor was entitled to be paid on a quantum meruit basis for the work done, and essentially not liable for the losses of the main contractor as a consequence of the subcontractor's stoppage of the works. Whilst these cases illustrate that a letter of intent does not normally of itself form a contract, there are many examples where a different interpretation has been placed. A letter of intent may occasionally take effect as an ancillary contract entitling the recipient to interim costs if the intended future contract is not made, and perhaps imposing liabilities, for example for the quality or suitability of work done. The recent case of VHE Construction v Alfred McAlpine looked into the subject of letters of intent. McAlpine had entered into a contract with the Black Country Development Corporation for the reclamation of land at West Bromwich, and because the project was late due to the insolvency of the previously engaged contractor, it was essential that work started as soon as possible. They therefore invited subcontractors to tender but were approached by VHE who had previously submitted a tender to other contractors on the site. VHE agreed to commence work before the contract was signed, although the parties had contemplated that they would enter into an FCEC blue form of subcontract. A number of issues remained to be resolved between them, including discounts and frequency of payment, and in fact throughout the construction of the works there remained disagreements between the parties on all of these matters. Unsurprisingly in court each party contested the other's version of events. The subcontractor argued that there was no contract between them and that they were therefore entitled to payment on a quantum meruit basis. Keen to establish that their version of events would prevail, each party reconstructed for the benefit of the court their recollections of the events and negotiations surrounding the commencement of the works. The judge advised that an examination of the progress of negotiations would be important in considering whether there was a contract, but he said it was contrary to legal principle to consider what was said in negotiations in construing the terms of the contract. "There is overwhelming evidence that there was a contract between the parties. The multitude of disputes raised late in the day about how certain items should be paid for are mainly a matter of construction of the agreement, although some of them genuinely contest whether an agreement was made. Those questions will not be resolved by a consideration of what was or was not said during negotiations, nor by disputes raised after the making of the agreement, but by a construction of the agreement which I find was made." The lesson here is that the court will generally try to find a contract from the evidence of the parties' negotiations, even though there may be a myriad of issues which remain to be resolved.
CJ-9721
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