Huw Morgan looks at some of the thorny issues raised by the practice of issuing letters of intent for public sector capital projects.
Public sector capital projects can take months, but more often than not, years of careful design, planning and procurement.
All the more frustrating is when the final details of the specification of the new building or refurbishment have been agreed, and you actually get the contractor on site, you then have to wait further precious days or sometimes weeks while the formal contract is drawn up and signed.
To ensure the programme is achieved, the authority may have to engage the contractor to mobilise, order material or even start work before the formal contract is drawn up. The authority is often advised to provide the contractor with the comfort of a letter of intent, stating that he intends to execute a contract in due course.
Such letters are notorious for creating uncertainty.
Once a formal contract has been signed it will often govern the relationship between the parties from the outset and the letter of intent will become redundant.
Where no formal contract has been executed, if the contractor starts work and the parties fall out and wish to go their separate ways, the letter of intent becomes crucial. The authority may wish to argue that the contractor was working at his own risk prior to the resolution of the contractual formalities, but this is rarely the outcome.
Much depends on the precise wording of the letter, but there are three broad possibilities.
The worst case for the authority is if the letter amounts to a binding contract. This will allow the contractor not only to be paid for the work done to date but also to recover compensation for the loss of profit he would have earned if the contract had been performed. This could prove a very expensive mistake for the authority.
Alternatively, a letter of intent may provide the contractor with a quantum meruit claim for the work he has performed even if no contract has been created.
Quantum meruit means 'the amount he deserves'. If the letter provides evidence of a request by the authority to carry out work combined with an intention to pay, the contractor is entitled to a reasonable price, which includes a reasonable profit for the work he has done, even if the job is later aborted. This may seem fair but it might be more than the authority had expected to pay.
The third and best interpretation is that the letter is viewed as a mini contract limited in time and money and giving certainty as to quality.
If properly drafted, a letter of intent can provide a perfectly safe and commercial method of achieving the authority's aims, allowing the contractor to start work as early as possible but at the same time protecting the authority against the unwelcome consequences mentioned above.
A well constructed letter of intent will:
- entitle the contractor to enter the site, provided the appropriate health and safety and the insurance requirements have been met;
- oblige the contractor to do a limited amount of work in a given time frame to an agreed quality;
- entitle the contractor to be paid for the work undertaken at the agreed contract rate.
But it will also:
- limit the authority's overall financial exposure;
- ensure the authority receives title in any goods or materials that are purchased on its behalf;
- allow the authority to terminate the letter before the formal contract is signed if for any reason it does not wish to go ahead with the project.