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Keeping it legal.

Byline: By Victoria Ferguson

It is common practice in small businesses for people to start a business relationship involving the supply of services using a letter of intent, until the conclusion of a more detailed contract.

However, recent case law illustrates the danger of relying on letters of intent for an indefinite period rather than agreeing a detailed contract.

In the case of Mowlem plc v Stena Line Ports, the Technology and Construction Court enforced the terms of the most recent letter of intent between the parties.

In this case, the parties' relationship was governed by a series of letters of intent, the latest of which limited the contractor's (Mowlem) entitlement to payment to the sum of pounds 10m for work provided up to a given date. Mowlem argued that as it had carried out work over and above the pounds 10m limit and beyond the agreed date, it was entitled to reasonable payment for such work by way of an implied term.

Failing that, Mowlem claimed that Stena Line could not rely on the pounds 10m limit as it had allowed Mowlem to proceed with the works beyond the agreed date.

The court held however that the terms of the letter of intent prevailed and that the fee limit applied, commenting that it would be a commercial nonsense if a contractor could avoid a contractual limit on cost by simply continuing to carry out work beyond both the specified date and financial limit.

The court found no evidence Stena had given Mowlem reason to believe that it was not relying upon the terms of the letter of intent and no assumption between the parties that Mowlem would be paid a reasonable sum in respect of sums exceeding the financial limit.

The court pointed out Mowlem would have been entitled under the terms of the letter of intent to cease carrying out work at any time once the threshold had been exceeded.

Where businesses are relying upon letters of intent, their terms should be considered carefully. While it may be commercially difficult to cease work while further payments are negotiated by the parties, a well-drafted agreement makes provision for this.

The outcome of this case should act as a warning of the dangers of relying on a letter of intent to govern a business' relationship with another party for an indefinite period.

To ensure legal certainty, it is advisable to enter into a well-drafted written contract as soon as possible.

Victoria Ferguson is a solicitor at Dickinson Dees law firm.
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Publication:The Journal (Newcastle, England)
Geographic Code:4EUUK
Date:Jun 7, 2005
Words:420
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