Letters of intent are often used where
negotiations are not keeping pace with programme. Emcor Drake and
Scull v Sir Robert McAlpine reminds us that a Letter of Intent can
be a recipe for disaster
How about this? Start negotiating sub-contract
terms. Do so for about a year. Realise programme constraints mean
works must start immediately. Start the sub-contract works using an
unsigned letter of intent with a maximum sum of £1,000,000.
Continue under an unsigned letter of intent with the same maximum
sum but different terms. Carry on negotiating the sub-contract
– carry on a bit more. About six months later realise you're
still not getting very far. Increase the maximum sum to £3,000,000.
Continue sub-contract negotiations. After a further six months,
increase the maximum sum again (to £8,000,000). Carry on
sub-contract negotiations. A few months later, increase the maximum
sum yet again (now to £14,000,000). All the while, continue full
sub-contract negotiations. After nearly a year and a half of works
realise you're getting nowhere and call it a day. Argue over
whether you have a contract for the whole of the works, just part
of the works, or something else altogether.
Appetising? OK, maybe not appetising, but a
familiar flavour? The facts are essentially those of Emcor
Drake and Scull Limited v Sir Robert McAlpine Limited 
EWHC 1017 (TCC) and the decision in that case was recently upheld
in the court of appeal.
Letters of intent ("LoIs") are often used where
negotiations are not keeping pace with programme. Their familiarity
can make parties feel quite comfortable with them; after all,
nothing has gone wrong before. However, EDS v SRM reminds us that
an LoI is a recipe for disaster: if you don't replace it with a
full contract quickly you could end up with a nasty taste in the
The project involved new building and refurbishment
of the existing Russells Hall Hospital and the construction of day
centres at Corbett and Guest Hospitals. The Dudley Group of
Hospitals NHS Trust signed a project agreement with Summit
Healthcare (Dudley) Limited under the private finance initiative.
Summit in turn signed a main contract with SRM. SRM wished to
appoint EDS as mechanical and electrical sub-contractor. EDS worked
for SRM for about eighteen months until their relationship broke
down and EDS left the site.
EDS sued for work done but not paid for. SRM
(amongst other things) wanted a declaration that it was entitled to
an indemnity for EDS's fundamental breach of contract. SRM said it
had a full sub-contract with EDS for the whole of the works.
Accordingly, by leaving the site before completing the whole of the
works, EDS had fundamentally breached that contract. On the other
side, EDS said the parties were working under an LoI, not a full
sub-contract. EDS said it had performed in accordance with the LoI,
which allowed only the performance of certain works up to a
specified maximum sum. EDS said that it had therefore not committed
a fundamental breach of contract. The court's job was to decide (as
a preliminary issue) whether EDS and SRM had a contract for the
whole of the works or something else.
The court said there was no contract for the whole
of the works. The parties acted as though they expected a full
sub-contract would be signed. This suggested they did not think a
full sub-contract was already in place. They were also still
negotiating how to transfer material clauses from the main contract
into the sub-contract. Accordingly, the court would most likely say
a contract for the whole of the works was void because its terms
were too uncertain.
Alternatively, if the contract was not void, EDS
had not made an offer to perform the whole of the works that was
capable of acceptance by SRM. This was because EDS and SRM had
still not agreed a position on yet more key points: design risk,
completion dates and liquidated damages.
Instead the court held SRM and EDS had a contract
only for the works specified in the LoI and only up to the maximum
sum set out in the LoI.
The easy moral of the tale is that you should 'just
say no' to an LoI. If you did this, you would avoid a costly
dispute as to whether a contract exists and its basic terms.
However, this is sometimes not realistic and an LoI is the only
commercial solution. If you find a letter of intent is necessary,
make sure your LoI addresses the issues arising in EDS v
First, consider whether you want a commitment to
sign the full contract included in the LoI. The LoI in EDS v SRM
listed out the terms which would form the eventual sub-contract. It
also said that, upon SRM's request, EDS had to sign the
sub-contract. The court said SRM could have made EDS sign the
sub-contract if SRM had given EDS drafts which contained the terms
listed in the LoI (in the event SRM failed to do this). So, at
least where the LoI sets out the full contract's terms, an
obligation to sign a compliant contract will be upheld. Think
carefully about whether you are willing to make a commitment to
sign the full contract; if you have not yet finalised your own
position, better to steer clear.
Second, think about how you will use the letter of
intent and ensure the letter reflects this. For example, in
practice will you use the payment, variation or dispute clauses set
out in the full contract drafts? If so, and they are agreed,
consider incorporating these clauses by reference. If a different
mechanism is to be used, specify this (note the Scheme for
Construction Contracts may apply if you remain silent). If you use
clauses from the full sub-contract which are not incorporated into
the LoI, the other party may say you have agreed the full contract
This is what happened in EDS v SRM. SRM pointed out
that EDS's applications for payment dealt with retention and
included amounts for variations and claims. The full sub-contract
terms referred to these, but the LoI did not. Accordingly, SRM
argued, the full sub-contract must be in place. In the event, the
court decided against this. However, the court accepted these
points were 'some evidence of a common assumption that a full
sub-contract existed'. This is consistent with the approach taken
in an earlier case. In that case, the parties to an LoI performed
their obligations as though the full contract terms had been
agreed. The court said this meant one party was prevented from
denying that the full terms applied.
Ensure your LoI is consistent with your intended
Third, beware any maximum sums. EDS exceeded the
maximum sum it could recover under the letter of intent several
times. SRM could have successfully argued that EDM was not entitled
to be paid anything above the maximum sum. EDS acknowledged this
risk in correspondence with SRM. Luckily for EDS, SRM increased the
maximum sum several times (except for the final payment
application). However, it would have been better for EDS if it had
agreed such increases with SRM before the maximum sum was
As an aside, note the present case was unusual in
that the contractor needed to argue the maximum sum did not apply.
More commonly the contractor needs to argue a maximum sum does
apply so that it can avoid paying a higher sum to the
sub-contractor. In this latter scenario, there is case law
suggesting a contractor's liability to a sub-contractor can exceed
the maximum sum in certain situations.
Maximum sums are useful mechanisms, but should be
drafted and used carefully.
Fourth, whilst lawyers get worked up about the
inadequacies of letters of intent, it's still worth making sure the
thing is actually signed by both parties. Correspondence flying
about with signatures on letters containing different terms only
invites argument. In EDS v SRM, SRM's initial draft letter of
intent was followed by an amended version produced by EDS which was
never signed by SRM. This lack of clear documentation worsened the
confusion and no doubt increased legal costs.
Fifth and finally, there is no substitute for
getting the full contract signed. Don't give in to the temptation
of letting negotiations slip whilst energy is focused on the works
– dedicate someone to finalising full contract terms at the
For further information please contact Alex
Cunliffe on +44(0)20 7367 2670 or at firstname.lastname@example.org