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The letter of intent is a familiar figure in construction disputes

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legal matters

It is often said that if the construction industry devoted as much time and energy to its pre-contract arrangements as it does to its disputes, the vast majority of those disputes would never happen in the first place. The industry tends to operate a policy of cure rather than prevention.

A heady combination of unseemly rush and untested optimism, fuelled by the light of pound signs in the eyes, tends to colour the industry's attitude. Of course, as the pound signs fade - and with them the optimism - there is an opportunity to reflect on the wisdom of this approach.

But the experience tends not to leave a lasting impression, and certainly appears to do little to undermine the enthusiasm for the next big, lucrative, fast-track venture.

A recurring figure in this familiar cycle of events is the letter of intent. A creature of the pre-contract rush, the letter of intent is designed to reassure the contractor that they have landed the job and spare the employer the time-consuming and troublesome job of setting out the agreed terms.

The problem with the letter of intent is that it is an illusion, purporting to mean exactly what both parties want it to mean.

Whether it is up to the task depends entirely on the strength of the underlying bargain. If there is no agreement as to scope of work, programme and price, the letter of intent will evaporate, along with the optimism and the pound signs, leaving behind, at best, an entitlement to be paid a quantum meruit (reasonable sum) for work done on the strength of it.

Conversely, if a sound bargain has been struck, the letter of intent will stand up with all the force of a contract.

Usually it is only inadvertence or carelessness that leaves the bargain behind the letter of intent open to interpretation. Sometimes, however, there is something more, as in the recent case of Twintec v GSE Building and Civil Engineer (judgment 24.3.03). GSE was to carry out groundworks for a new B&Q warehouse in Kent.

In May 2001, it commenced negotiations with Twintec, a specialist concrete flooring contractor, to provide the floor slabs. Negotiations between GSE and Twintec reached an advanced state. By July, Twintec was GSE's 'preferred subcontractor'.

In August, the two firms met to discuss Twintec's quotation. Thereafter, GSE sent Twintec a letter of intent and Twintec started its design work. By November, the design was complete and Twintec was ready to start on site a month later.

During that summer, though, Twintec's commercial director, Mr Martin, fell out with his managing director, and by October he had left the company in what were described as 'unhappy circumstances' to set up his own rival company, Isotec. In December, Twintec was surprised to find Mr Martin's new company on site. When it enquired of GSE as to its position, Twintec was told that the company had 'changed its mind' and elected to use Isotec instead.

In Twintec's proceedings for breach of contract GSE argued, simply, that there was no contract; that the letter of intent was no more than that; and that a binding agreement had never been concluded.

Judge Frances Kirkham heard evidence from Mr Martin, whom she described as 'very much his own man'. She rejected his suggestion that after the August meeting he had been instructed to go back to GSE with new terms. Nor did she believe that he was contacted 'out of the blue' by GSE in December.

She was also struck by the similarities between Twintec's original quotation and design and that adopted by Isotec. Although it was not necessary for the judge to decide why GSE chose to abandon Twintec and contract Isotec instead, she was not surprised by GSE's concession that its position was 'commercially unattractive'. She concluded that, by August, Twintec and GSE had agreed all the essential terms of a contract and that the letter of intent had contractual force.

Happily for Twintec, GSE would have to pay for the privilege of changing its mind. But the whole business could have been avoided, had the companies taken the time to draw up an agreement in the first place.

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