In recent years letters of intent have given rise to countless disputes and thus kept some lawyers in jobs. Strictly speaking a letter of intent is a letter that signifies an intention to enter into a contract at some future date; in itself it is not a contract. But here is the rub, writes Professor Rudi Klein.
The wording used in the letter could indicate that the parties had intended to enter into a legally binding agreement from the outset. Disputes arise because it is often not clear from the wording whether the parties had intended to create a legally binding agreement.
Merit Process Engineering Ltd v Balfour Beatty Engineering Services (HY) Ltd
Balfour Beatty Engineering Services (BBES) had engaged Merit Process Engineering (MPE) to deliver three separate work packages for a project known as the Diamond Synchrotron Project at Chilton in Oxfordshire. MPE was the claimant and BBES was the defendant. The packages related to the construction of scientific and research facilities.
MPE was invited to carry out work on the largest package under a letter of intent pending agreement on a formal sub-contract. The letter of intent included the following paragraph:
“it is agreed that if the contract is not concluded between us, subject to the following restriction, you will be entitled to re-imbursement of your actual costs, properly and exclusively incurred in complying with these instructions, but you will have no entitlement to claim loss of profit on any other consequential loss, cost or expense”.
Discussion continued between the parties after the letter of intent was issued to MPE. But agreement on the most important issue – the price – was proving difficult to achieve as BBES wanted a discount to be applied to the price. Eventually BBES sent MPE formal sub-contract documentation stating a price of £1,600,000. MPE responded that the figure should be amended to show a price of £1,637,500. It did not sign the documentation but continued working. Some six years later MPE issued court proceedings claiming £685,000 plus VAT.
The lack of agreement over price was the key issue in the case. MPE was adamant that the agreed price was £1,637,500. BBES responded that the contract price was £1.6 million, reflecting the main contractor’s discount of 2.5 per cent. The only difference between the parties, BBES argued, was whether or not a main contractor’s discount applied but this was not an essential term of the contract.
The judge, Mr Justice Edwards-Stuart, disagreed:
“£37,500 may not seem a substantial amount by comparison with a contract price in the region of £1.6million, but I cannot see how it can be regarded as either de minimis or otherwise non-essential”.
The judge accepted MPE’s point that margins on the work in question were between two and three per cent and, therefore, the difference of £37,500 was critical in ensuring that the job would be profitable.
BBES was desperately keen to show that the letter of intent had ‘morphed’ into a sub-contract. One of the documents forwarded to MPE by BBES in the continuing negotiations after the letter of intent was issued referred to a dispute resolution procedure requiring disputes to be referred to arbitration. BBES wanted to stay (or stop) the court proceedings and have the dispute referred to arbitration on the basis that this was in the sub-contract. But was there a sub-contract?
Was there a sub-contract?
As the judge observed, there was a significant difference between the parties in relation to what was agreed on price. Moreover there was no way of working out what should have been the price or even what would have been a fair price. In other words there were no objective criteria that might have enabled a price to be calculated in the absence of an agreement on price.
The price is, of course, the most important term in any contract. If the evidence shows, as in this case, that the parties had not reached agreement on such a fundamental term, the court is unlikely to accept that a contract had come into being.
There was no sub-contract. Therefore BBES could not put off matters by forcing MPE to re-start the process by going to arbitration instead. But what about MPE’s claim? The judge said that the letter of intent had governed the relationship between the parties until (or if) a formal sub-contract had been agreed.
MPE was still entitled to its “actual costs, properly and exclusively incurred in complying” with the letter of intent. It should be noted that this would not have enabled MPE to recover any profit.