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Make intentions clear

LAW - Working on the basis of letters of intent can leave eager contractors out of pocket on complex jobs - it is always best to make time to write a contract and clearly state costs, writes Daniel Atkinson

PEOPLE often forget how difficult and complicated the construction process is. A design is only an idea: the contractor makes it reality.

Because a contractor is entrusted with this task, it is normal for the contractor to have a contract with its employer to make clear what is required.This document sets out the contractor's obligations and how much it will be paid for its work.

But sometimes the employer is in a hurry and the contract cannot be agreed in time.Because most contractors just want to get on with the project they are often willing to start large and complicated projects on a promise to pay.A consequence of this is a massive body of case law on 'letters of intent'.

Letters of intent are usually one or two pages long and replace volumes of documentation that would be needed for a contract.The letter of intent will usually state the employer's good intentions to contract with the contractor at some time and say that if a contract is not concluded, the employer will pay the contractor's costs. Usually, the letter of intent limits the costs the employer is prepared to pay.

On that flimsy basis many a large and expensive project proceeds.Everyone concentrates on completing the work and quite often the contract is forgotten. Problems often only arise when the project is finished: the contractor claims more than the limit set by the letter of intent - 'After all, ' he says, 'I got the job done.' But is he entitled to more than the limit? This is where lawyers come in, and there are plenty of legal theories at play.

The latest case on letters of intent is Mowlem Plc v Stena Line Ports Limited [2004]. Stena, the owner and operator of the port of Holyhead in Anglesey, wanted a new ferry terminal built.Mowlem carried out the marine and offshore works under several letters of intent.

In the first letter, issued on October 17, 2002, Stena committed to pay Mowlem up to a maximum of £400,000 so it could get to work. As work progressed, further letters of intent were written in order to increase this limit, each superseding the previous letter.The last letter was issued on July 4, 2004, and set the maximum at £10 million.

Stena stated in the first letter that the commitment would allow Mowlem to proceed with the works in accordance with the programme until July 18, 2003.That date was significant because it was the date shown on the programme for completion.

Mowlem did not complete by July 18, 2003.Stena was pressing Mowlem to complete the work because of a mistaken assumption that somehow there was a contract that required Mowlem to do that.

Mowlem continued working and received instructions from Stena's consultants in the usual way.

The job was completed with Mowlem claiming the cost of the work had exceeded the limit of £10 million. Stena contested this.Mowlem pointed out that the letter of intent only applied to work up to July 18, 2003, so it was entitled to payment for work done after that date irrespective of the limit.Mowlem also said that, as it had carried on working after the original cost limit had been reached, it was entitled to be paid for this work; the limit only applied until the limit was reached, it said.

Judge Seymour, deciding the case, disagreed. It made no commercial sense, he said, to have a financial limit on Stena's obligation to make payment that could be avoided by simply carrying on working after the date of July 18, 2003.The letter of intent was not limited to work before that date and it was bizarre if the limit could be avoided by simply exceeding it.

Mowlem also raised a number of arguments that are common in such cases.One was that the client had acted in such a way that led Mowlem to believe it would not insist on the limit.This was rejected on the facts.Mowlem also said there was an assumption by both parties that Mowlem would be paid a reasonable sum. Not so, said the judge; the evidence was against any such assumption.

So what should a contractor do when carrying out work to a financial limit? Under the letters of intent in this case there was no obligation on the contractor to continue with the work.Mowlem could stop at any time without being in breach of contract.

This means that, if the contractor considers that the limit imposed for the work is too low in the light of the work carried out, it should stop work.

Of course, a contractor should always include the employer in the appraisal of its costs at an early stage, making clear its intentions and thereby avoid having to stop.

Careful legal advice is necessary before stopping work since, if there is indeed an obligation to complete work, then the contractor will be in breach of contract.

The lesson for contractors is clear.Make time to conclude a contract. If you use a letter of intent, then establish the trigger that will end your obligations.

If there is a limit to the costs, establish a system to manage the risk of passing the limit.

Completing the work then is no longer the priority - the quantity surveyors are in control.