The Best Of Intentions: Contract Formation Under Letters Of Intent

In the fast-paced world of construction projects, letters of

intent are a common feature of the contractual landscape. So what

happens if the formal contract being negotiated is never entered

into? We take a brief look at some of the approaches the Courts

have taken in light of a recent decision of the Court of

Appeal.

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Where a building project is time-critical (as it often is) and

contractual negotiations are ongoing, it is common for parties to

enter into a letter of intent ("LOI") to

enable the Contractor to commence work before the contract proper

has been finalised. The form and content of LOIs are as varied as

the circumstances in which they may be issued.No doubt it is this

variety that led Robert Goff J in British Steel Corp v

Cleveland Bridge and Engineering Co Ltd (1984) to observe that

there is "no hard and fast answer to the question whether

a letter of intent will give rise to a binding agreement:

everything must depend on the circumstances of the particular

case."

British Steel

British Steel concerned negotiations between British

Steel Corp ("BSC") and Cleveland Bridge

and Engineering ("CBE") for the sale of

steel nodes to be manufactured and delivered by BSC.

CBE issued a LOI, which stated the price and proposed

contractual terms (in the form of the I.C.E. standard form

sub-contract)

The LOI requested that BSC proceed with the work

"pending the preparation and issuing to you of the

official form of sub-contract"

Disagreements subsequently arose between the parties in

relation to the price and other contractual conditions. In

particular, BSC proposed its own standard conditions, which

contained a limitation of liability for late delivery (under the

I.C.E. conditions, liability was unlimited). Although these

disagreements were never resolved, BSC went ahead with production

and delivery of the nodes

CBE refused to pay for the nodes, instead claiming damages for

late delivery

Robert Goff J considered that a LOI could potentially give rise

to 2 different types of contract. However, the judge rejected both

on the basis that the LOI in question applied "pending a

formal sub-contract the terms of which were still in a state of

negotiation". (It was no doubt significant that agreement

had not yet been reached on a number of terms which, on the facts

of the case, were found by the judge to be essential).

Accordingly the Court found that no contract had been concluded

and CBE, as the party who had made the request for performance, was

obliged to pay BSC a reasonable sum for BSC's performance in

accordance with that request. In arriving at this conclusion, the

Court appears to have been particularly swayed by the fact that

both parties were pedalling their standard conditions, which each

took vastly different...