Why use a letter of intent?
Starting work on any project before a formal contract has been concluded is always risky. That risk can be managed and reduced by using a letter of intent to record whatever terms may be agreed to cover any work done, or services provided while the ‘main’ contract is agreed.
Get a letter of intent right and it will serve as an enforceable agreement in its own right. Get it wrong and you can be badly exposed.
Letters of intent often refer to some, or all, of the provisions of a standard form ‘main’ contract when parties want to adopt them in their interim arrangements in an attempt to incorporate them into the letter. There’s nothing wrong with this and the law on incorporating terms in this way is well known, but it never ceases to amaze me how many disputes blow up around incorporation.
How (not) to incorporate terms
Put simply, a party that wants to incorporate a term must take reasonable steps to bring that term’s existence to the other party’s attention before their transaction is concluded. If that’s done the counterparty will be deemed to have accepted the term if it proceeds in a way that accepts it, for example, starting work or paying without raising any objection in either case. There is a caveat to this though in terms of unusual or burdensome terms where more needs to be done to draw attention to them before they can become binding.
The key theme in most incorporation disputes is whether or not those reasonable steps were taken. Mr Justice Waksman’s decision in OD Developments & Projects Limited v. Oakwood Dry Lining Limited  EWHC2854 (TCC) contains an excellent and reader friendly analysis of an attempt to incorporate the terms of a JCT 2011 Design & Build Contract into a letter of intent for significant dry lining works.
The letter of intent confirmed that both sides wanted to enter into a formal contractual relationship that was to be based on the JCT agreement it referred to.
The letter included the following:
“We confirm that it is our intention to enter into formal contractual relations with yourselves, for the Dry Lining, as domestic subcontractor based on JCT 2011 Design & Build. The following information will be incorporated into, and form part of, any order with ourselves.”
A list of correspondence forming the basis of the order documentation followed which included a subcontract worth £1.2m, a timetable and other information.
The letter continued to say:
“This Letter of Intent is based on your knowledge and acceptance of the JCT Contracts stated”.
Looking at all of this in the round, the judge held that the references to the JCT terms were not sufficient to incorporate them into the letter of intent.
In his view, what the wording did was show an intention to enter into a JCT contract and agree various individual documents in advance. It did not mean that the JCT terms were actually incorporated at all. As he put it:
“It is one thing to agree on what particular documents you will have if you execute a JCT contract; it is quite another to say that you have, therefore, incorporated all of those JCT terms and conditions at the outset and at the same time”.
The takeaway point from this is clear; if you’re preparing a letter of intent, say exactly what you mean and use very clear wording that unambiguously says that any terms you want to incorporate into the letter are incorporated. Doing anything less runs a very real risk that those terms won’t become part of the letter and won’t be enforceable.