20th May 2020
As we slowly emerge from the lockdown and the country starts to get back to business, the people involved in and around construction reflect on the fact the industry – or certainly parts of it - has been one of the few which has continued working during the crisis.
However, the industry has suffered considerably, with a reduction in the number of new starts and work on existing sites progressing much slower than normal. Some clients, perhaps understandably, remain nervous about entering into contracts and are seeking advice on how to protect themselves from delay and monetary claims in the future.
Progress on sites is expected to be slow as contractors comply with Government guidelines and site operating procedures. Meanwhile, the supply of materials and equipment is likely to be disrupted for months to come. Of more concern, however, is what happens if we experience a second wave of the virus.
When it comes to entering into building contracts, one alternative approach being taken by some employer clients is using a letter of intent (LOI) or a pre-construction services agreement (PCSA) to engage with a contractor and to get them to start working a project, even where the contract terms have been agreed. The benefit to employer clients is that it avoids binding them into a building contract and allows them a degree of flexibility in case a situation arises which means the project may no longer be viable in the timescale planned.
LOIs are regularly used in a number of situations – but primarily where the parties to a building contract haven’t agreed all of the key terms and details, and the employer is under a time pressure to get design and procurement activities and/or preparation works started. They generally demonstrate an employer’s intention to enter into a building contract later on and provide a short-term contractual solution until the contract can be signed. It is unusual for LOIs to be used where terms have already been agreed.
Many lawyers would advise against using a LOI unless it’s absolutely necessary and only recommend their use where there is no chance of concluding the agreement of the building contract in time. They would almost certainly suggest LOIs are not used where terms have been agreed.
Notwithstanding the usual reluctance, LOIs, where used, must be drafted carefully to protect both parties, but in particular, to avoid creating a contract which binds the parties in respect of the whole of the planned construction work.
Preparing LOIs - key features and pitfalls to avoid
While LOIs should only be used in certain circumstances and for a limited period of time, in most cases it is preferable for both parties to agree the terms of and enter into a building contract. Employer clients should be aware that the longer a LOI is left in place, the more difficult negotiations may become. Nevertheless, in these uncertain times, LOIs can provide the parties with some flexibility, until the position regarding COVID-19 becomes a bit clearer.
Please note: Nothing in this article constitutes legal advice and we are not liable for any reliance on the information provided. This is a rapidly changing subject, and whilst correct at the time of writing, circumstances may have changed since publication.
To find out more about anything covered in the article, or to discuss the potential impact of the coronavirus pandemic on the construction industry, please contact Michael Chilton or another member of Thrings’ Construction team.