Letters of Intent Essay Example | Topics and Well Written Essays - 2000 words

Letters of Intent - Essay Example Letters of intent basically are a non-binding statement of the future intention of the involved parties and serve as an interim contract that outlines the terms that will govern the relationship of the parties before execution of the legal contract. The legal effect of letters of intent in the construction industry is that the contractor can only be paid on ‘quantum meruit’ basis for the reasonable work done (Furmston, Norisada and Poole 1998). The contractor or the employer can stop the work at anytime without a legal notice thus no party will be able to claim any damages for delays or defective work since no legal contract has been established. Another risk of relying on the letters of intent in the construction industry is that parties may presume that a letter of intent has been replaced with a full contract after the expiry of the date of the letter thus leading to non-entitlement of payments (Furst, Ramsey, Williamson, & Uff 2012). Such documents may contain some b inding provisions such as non-disclosure agreements and covenants that the parties involved should negotiate in good faith. A letter of intent can simply be referred as an expression by one party of an intention to form a legal and binding contract. In the case of Cleveland Bridge and Engineering Co v British Steel Corporation (1984), the court held that a letter of intent is not binding since important elements of contract such a price were lacking, but contractors have a right to be compensated on a reasonable basis for their work (Furmston, Norisada and Poole 1998). Advantages and disadvantages of letters of intent There are certain advantages for the use of letters of intent in UK construction industry. Though not legally binding, the letter may save the employer the costs associated with attorney fee or accounting fees in the formation of the contract (Ashworth 2012). The letter will signify an intention to enter in to a binding contract before any substantial expenses have bee n incurred by either party. The letter is usually straightforward and is useful in the contract negotiation process since it provides the opportunity to include contract clauses such as binding terms and non-disclosure provisions. The letter will increase the confidence of both parties to the deal through establishing the time frames, expenditure and payment terms for the work activities. The letter of intent will allow the contractor the opportunity to include ‘no shop’ clause that means that the employer will not allow other contractors to solicit or negotiate for the same construction work (Knowles 2012). The letter allows both parties to adhere to the future contract terms such as non-completion covenants, special agreements, warranties and price (Lewison 2011). However, letters of intent suffer several disadvantages since they cannot bind the parties. Such letters may lead to double negotiation of the work thus delaying the completion of the construction work. Afte r signing the letter of intent, it might be difficult for the parties to renegotiate the substantive terms and conditions of the deal since such letters are non-binding. The employer is left at a disadvantaged position by the ‘no shop’ clause since he or she cannot negotiate or solicit competing offers from other potential contractors. The employer is also at risk since the contractor may dishonor his promise