The Rocky Road From Letter Of Intent To Formal Contract

There is no universally accepted template for a Letter of Intent and very often parties will adopt their own bespoke form. The transition from Letter of Intent to formal contract can continue for much of the progress of the works themselves and may not always result in the execution of a formal contract. If no such contract is entered into, then a dispute may arise as to what was in fact agreed between the parties, whether such agreement amounts to a formal contract or whether the circumstances indicate that the Letter of Intent remained in force. This was the issue raised in the recent English High Court case of Spartafield v Penten Group1 decided in the Technology & Construction Court on 29 September 2016.

The facts The decision Conclusion: what it means for you The facts

In this case, works were initially carried out on the basis of a Letter of Intent anticipating a signed contract but the contract was not eventually executed. The issue to be decided by the Court was whether the Letter of Intent had been replaced by a subsequent contract in the Joint Contracts Tribunal ("JCT") Intermediate Form that was referred to in the Letter of Intent.

The Letter of Intent authorised work to proceed for a fixed sum and referred to the intention to enter into a contract. It said that, if a formally executed contract did not come into existence, then the contractor would be reimbursed for any costs paid to third parties and that those sums would, so far as reasonably possible, be determined by reference to the sums payable under the proposed formal JCT contract. It said that the formal contract document would follow in due course.

There were negotiations between the parties in relation to the terms of the draft contract which proceeded for much of the period during which the works were being carried out. The Court found that there was eventually no issue between the parties as to price, scope, applicable JCT conditions and time for completion. However, it was the contractor's case that they eventually refused to sign the contract and that the Letter of Intent imposed a conditional requirement for formal execution akin to "subject to contract". Therefore, the contract was never executed and the parties' contractual relationship remained on the basis of the Letter of Intent.

The decision

The Court considered the law on contract formation, in particular, the Supreme Court's decision in the RTS case (2010)2. This case, and earlier authorities, indicated...