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Letters of Intent and Subject to Contract in Building Contracts

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Subject to contract negotiations and letters of intent – don’t walk off site before checking it out

The general rule is that letters of intent described as being “subject to contact” will not result in a binding contract having been reached because these words mean that a formal agreement between the parties will not come into existence until a formal contract is agreed.

An example of this is to be found in the Court of Appeal decision of Whittle Movers Limited v Hollywood Express Limited [2009] EWCA Civ 1189 in which it was decided that there had been no contract concluded after examining an interim agreement, “subject to contract” negotiations and the parties conduct. The Court of Appeal overturned a decision of a High Court Judge who had decided that a formal contact had come into existence even though the negotiations had been described as “subject to contract”. The facts showed that the terms of performance were still under negotiation. This meant that all of the negotiations towards reaching an agreed contract were “subject to contract” and that no binding arrangement was to come into existence until a formal contractual document was signed.

However in exceptional circumstances the court might find that a contact has been reached between the parties even though the words “subject to contract” have been used in a letter of intent.This is because the court might find, depending on the facts of the case, that each party has carried out those things that the letter of intent contemplated for the benefit of the other. This was found to be the case in The Rugby Group Ltd -v- Proforce Recruit Ltd [2005] EWHC 70, where it was decided on the facts of the case the parties had agreed to be contractually bound even though the words “subject to contract” had been used in the contractual negotiations and even though a formal contract had not been drawn up and signed.

This approach was followed in the Supreme Court decision of RTS Flexible Systems Limited v Molkerei Alos Muller Gmbh & Company KG (UK Production) [2010] EWCA Civ 26 where it was decided that the parties had agreed to be bound by the agreed terms without the necessity of a formal written contact being drawn up even though the words “subject to contract” had been used in negotiations. The court decided that the parties had by their conduct agreed to waive the need to draw up a formal contract and to waive the requirement that contractual negotiations were “subject to contract”.
This means that if the court was to find that a binding contact had been entered despite the use of the words “subject to contract” in a letter of intent, because the facts of the case lead to the conclusion that the parties waived the need for a formal written contract being entered into or that the conduct of the parties show that a contract has been agreed without a written contract being entered into, what does this mean for contractor who wants to walk off the job because he has not been paid by the employer? The answer is that there is an element of risk that a court may later find, despite these words being used, that a contract has been agreed and by walking off site the contractor has repudiated the contract and can be sued by the employer for damages for breach of contract. If the court finds later on that a binding contract exists they will also find that an absolute refusal to carry out work or an abandonment of the work by the Contractor before it is substantially completed without any lawful excuse is a repudiation by him.

Before you make such a drastic decision to walk off site and all you have in writing is a letter of intent marked “subject to contract”, talk to us at MJD first and we will check it out and your paper work, so that you are in a better position to know when to make the call of downing tools in response to non payment.

Anthony Philpott

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MJD Solicitors | Matthew Dillon

Matthew Dillon

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