The Concluded Bargain: Near Enough Good Enough?

A letter of intent can undoubtedly be used effectively to quickly kick off a project or as a temporary solution pending the parties' agreement on the formal agreement. In the right circumstances, and if used appropriately, a letter of intent can set the foundation for a good working relationship between the parties.

It is, unfortunately, a common occurrence that a letter of intent tends to create more problems than it resolves. All too frequently after the signing of a letter of intent, the parties neglect to formalize the main agreement and simply rely on the letter of intent. It is also a known practice, especially for engagements with low fee values, that letters of intent are used to circumvent the difficulties that typically arise in commercial negotiations given the number and complexity of issues in both standard and bespoke forms of contracts.

A "near enough is good enough" approach can create a multitude of both practical and legal risks for both an employer and a contractor, including such matters as the binding nature of any letter of intent, the sufficiency of its terms pending a formal agreement, certainty in the parties' rights and obligations, and whether the parties have, in fact, reached a finally concluded bargain.

A recent decision of the Technology and Construction Court in the United Kingdon has again highlighted the difficulties that can be placed on contracting parties when seeking to rely on the terms of an agreement, which, in fact, had not been finally concluded between the parties.

The Case

The Court was asked to consider an application by the Defendant in the action, Balfour Beatty Engineering Services (HY) Limited (Balfour Beatty), to stay an action brought by the Claimant, Merit Process Engineering Ltd (Merit) pursuant to CPR 62.3(2) and section 9 of the Arbitration Act 1996.1 The case highlights what could be described as a typical subcontract negotiation.

It is, unfortunately, a common occurrence that a letter of intent tends to create more problems than it resolves.

The claim brought by Merit related to three separate contracts made with Balfour Beatty. Balfour Beatty sought to argue that the proceedings should be stayed on the basis of agreed arbitration provisions in each of the three contracts. While Balfour Beatty succeeded in its argument on two of the three contracts, it failed in relation to a contract referred to in the case as the "main installation package" contract.

In not unusual circumstances, the parties entered into a letter of intent pending the agreement of a formal subcontract. The Court analysed in detail the negotiations between the parties on...