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  • Phillipa Mckernan

LETTERS OF INTENT: A CONTENTIOUS SOLUTION FOR THE CONSTRUCTION INDUSTRY


Construction industry Letters of Intent - Contentious solution?

THE PROBLEM


The construction industry is fast paced and every second counts when it comes to delivering a project on time!


In most commercial relationships, the parties would not commence the provision of services without a signed contract. However, in the construction industry it is common practice for procurement, site preparation and physical construction work to commence while the formal contractual documentation is negotiated.


THE ‘SOLUTION’


As a result, the Letter of Intent (“LOI”) has become a commonly utilised tool for bridging the gap between the commencement of work and the execution of formal contractual documentation.


The LOI is, in its simplest form, a letter indicating the intention of the parties to enter into a formal contract at a future date and, although common in practice, is not intended to replace the requirement of a formal contract.


A FLAWED SOLUTION?


While the LOI can be an effective tool in ensuring that construction work is commenced on time, poorly drafted LOIs usually result in costly legal disputes and strained commercial relationships!


Commercial disputes are inevitable, however the construction industry has become a victim of rising levels of disputes in recent years. The Arcadis 2022 report found the following:

  • the average construction dispute value is now $52.6 million;


  • the average length of a dispute is 15.4 months; and


  • the second highest ranking cause of those disputes is errors and/or omissions in the contractual documentation.


With this level of financial risk and disruption, can your business afford not to get its contractual documentation in order?


Despite these astonishing figures, many businesses continue to utilise the LOI carelessly and incorrectly. The most common way this occurs is when a template LOI is used whereby the only amendments made for each individual project centre around the name of the client and the price. This approach consistently results in the creation of a legal document that is:


  1. not fit for purpose;

  2. does not provide adequate protection; and

  3. does not reflect the intention of the parties.

Moreover, many individuals utilising the LOI do not understand that depending on the exact wording used, the LOI can create various legal obligations, as set out below.


THE VARIATIONS OF THE LETTER OF INTENT


Typically, LOIs fall into the following categories:


1. NON-BINDING STATEMENT OF INTENT


A LOI may take the form of a statement that the parties intend to enter into a contract at a future date. This form of LOI is sometimes referred to as a ‘comfort letter’.


It is usual for the basic commercial terms, such as costs, duration and project specifications to be set out in the letter.


However, it is important to understand that generally, those terms are not legally binding and the parties will not be able to bring any claim against the other for non-performance. Essentially, no legal relationship, nor any right of recourse, has been created.


2. BINDING INTERIM AGREEMENT


A LOI could also result in a binding agreement on its own terms that governs the relationship between the commencement of the construction works until the formal contract is executed.


This means that any terms agreed in the letter would be legally binding until the expiry date of the LOI or, depending on the drafting, until the main agreement is finalised.


3. FINAL BINDING AGREEMENT


It is also possible that although marked as a ‘Letter of Intent’, a final binding agreement could be created. This would occur where an offer capable of acceptance is made, giving rise to a binding contract in its own right.


If the intention is to create a non-binding letter of comfort or a binding interim agreement and a final binding agreement is instead created, the parties may have entered into, or failed to enter into terms unintentionally.


THE SOLUTION


It is essential that LOI’s are drafted by individuals with specialist legal knowledge and an understanding of the complex legal nature of the LOI.


If you use LOIs in your business, FG Solicitors can work with you to design bespoke letters of comfort and interim agreements, giving you legal certainty and reducing the likelihood of disputes arising.


We would also advise that, wherever possible, a carefully negotiated and agreed contractual document is implemented.

To make sure your Letter of Intent gives your business legal certainty, contact FG Solicitors today on 0808 172 93 22 or complete our quick contact form for a no obligation discussion!

WELCOME TO A MORE CONFIDENT FUTURE!


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This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.


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