Another recent decision of the Supreme Court addresses two key points. The first is the need to have agreed contract terms, before work starts under a contract and the second that, where a letter of intent is signed and work starts due to it, that a contract must be finalized as soon as possible after that. In this case, the parties entered into a contract formed by a letter of intent. When the letter of intent expired the work continued on, before the terms of the detailed written contract had been finalized.

The Court in its decision reiterated that in terms of letters of intent, it will not impose binding contracts where none existed and therefore each case will depend on its own facts, taking into consideration what is communicated between the parties by words or conduct. Where contracts are negotiated “subject to contract”, the Court noted that, it will not always infer that a contract has been agreed on those business terms that are “subject to contract”.

However, in this case, the Court decided that the parties had agreed a binding contract and that the binding contract was not subject to contract for the following reasons:

• Given the parties agreement over price, it was unrealistic to infer that the parties did not intend to create legal relations;
• All the essential terms had been agreed and variations were agreed without stating that they were “subject to contract”;
• The actions and communications of the parties indicated that they had accepted the contract terms and formed a legal contract, without the necessity to require a formal written contract; and
• The parties had negotiated in detail the clauses which comprised the terms as amended and as such the clauses had been essentially agreed and varied.

This case highlights the dangers inherent in starting work before a formal written contract is in place and such letters of intent should always be treated with caution.

However, if a letter of intent is inevitable, this should:

• Clearly specify those contract terms that have been agreed and those that remain outstanding, so that there is no uncertainty over what has or has not been agreed between the parties; and
• State that, no binding contract is to come into effect, except to the extent set out in the letter and that neither the letter nor any work done or payment made under the letter shall be deemed to be a waiver of the requirement to provide a binding contract.

Finally, every effort should be made to finalise the contract as soon as reasonably practicable after the letter of intent has been signed.