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Capital Projects and Letters of Intent - the Risks to Avoid

on Friday, 23 June 2017.

What should you be doing to make the construction process as smooth and timely as possible?

Capital projects at almost all schools inevitably work to tight timescales in order to maximise the construction time on site during school holidays. However, even when the final details of the specification of the new building or refurbishment have been agreed, putting in place a formal contract can take precious days or sometimes weeks.

To ensure the programme is achieved, you may have to engage the contractor to mobilise, order material or even start work before the formal contract is drawn up. Schools will often be 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 school 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.

Interpretation

Much depends on the precise wording of the letter, but there are a three broad possibilities.

  • The worst case for the school 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 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 school.

  • 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 your school 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 School 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.

Top Tips for Writing an Effective Letter of Intent

If properly drafted, a letter of intent can provide a perfectly safe and commercial method of achieving your school's aims: allowing the contractor to start work as early as possible but at the same time protecting you 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

  • limit the school's overall financial exposure

  • ensure the school receives title in any goods or materials that are purchased on its behalf

  • allow the school to terminate the letter before the formal contract is signed if for any reason it does not wish to go ahead with the project

How Can We Help You?

We have a team of specialist construction lawyers who regularly advise schools upon all aspect of the construction process and will be pleased to provide you with a template for safe and commercial letter of intent.


Please contact Huw Morgan, in our Contruction law team, on 0117 314 5293 if you have any queries or would like any further information.

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