This article examines the use of letter of intent in construction industry and contractor’s entitlement to payment under such arrangement. In general when parties are not ready to enter into a comprehensive agreement, whether under main contract or subcontract, letter of intent is used to signify their expectation to further negotiate and formalise a contract hopefully in the near future. Whilst optimism is a virtue, one should not be overly surprised if their intention for a binding agreement is never fulfilled. Under common law, the main contractor (or subcontractor depending on tier of contract) may still be entitled to financial compensation for works done on a quantum meruit basis notwithstanding the lack of a signed contract.

So why do parties proceed with construction works when they are not ready to enter into an agreement? This question will be examined further in the next section of this article but suffice to say that whilst parties may not be ready to conclude a contract and sign on the dotted line, parties were objectively in agreement to have the selected contractor proceed with carrying out of the works. In other words, the choice of contractor should not be in doubt despite the lack of comprehensive contract or signed agreement. Whilst such arrangement presents risks to both parties, the Employer is likely to benefit from a schedule perspective in exchange for the risks assumed. Therefore under the law, the Employer is not entitled to refuse payment for work done and be unjustly enriched when the expectation of an eventual contract is not fulfilled. The Employer is required to pay the contractor a reasonable sum for work already done to restitute for costs and overheads incurred. How such amount is derived will also be examined in this article.

To be clear, it is essential for contractors to understand quantum meruit claims even in the absence of letter of intent. This is due to a common practice for parties involved in construction works to negotiate over text messages, emails, telephone conversations, face to face discussions etc without ever recording the agreed terms within four corners of a contract. When dispute arises, the contractor could still be entitled to payment on a quantum meruit basis even if it was unable to produce a signed document be it letter of intent or letter of acceptance. However such approach is unnecessarily risky and could have been avoided quite easily. This is because both disputing parties will have a very different interpretation or recollection of what should be the amount payable.

One of the crucial features of payment entitlement for a contractor is consistent cashflow to finance the works. In this regard, Building and Construction Industry Security of Payment Act 2004 (SOP Act) provides claimant rights to statutory adjudication in case interim progress payments are withheld for no valid reasons. Contractor that obtains favourable adjudication determination can seek court’s assistance for legal enforcement. However the rights under SOP Act are available only when there is a contract made in writing. Upon closer inspection of Section 4 of SOP Act, the definition of ‘contract made in writing’ encompasses a rather wide range of scenarios including where (1) there is no signature, (2) consist of a series of exchange of written communications, (3) only recorded by one party (or a third party), (4) a record which contains reference to terms in writing or (5) the contract is not wholly in writing but the matter in dispute within the contract is in writing. Therefore depending on the facts of the case, some have sought to argue that their letter of intent represents an interim agreement between parties recording only essential terms of construction contract. In other words, whether a letter of intent is indeed a ‘construction contract in writing’ depends on the substance rather than label of the document. As there is no universally recognised template of what exclusively amounts to letter of intent, it will be worthwhile to examine further how a contractor can protect its interest in negotiating letter of intent so as to avail itself rights under SOP Act. This requires one to understand the differences between letter of intent and letter of acceptance.

Reasons For Using Letter Of Intent In Construction Industry

As alluded to earlier the conventional wisdom is that letter of intent is used to allow parties to negotiate critical terms and carry out the scope of works concurrently so as to be ‘efficient’ by overlapping two separate activities. Whilst this may be the case occasionally, the Employer loses significant amount of its negotiation leverage once the contractor commences work. The negative legal and financial consequences of retrospectively evicting a contractor from site due to failure to agree on certain terms disproportionately exceed the benefit of preserving rights to negotiate. Most property developers are alive to this fact, and therefore uses competing bids as a tool to drive negotiation rather than succumbing to time pressure by commencing works prematurely. In reality most letter of intents are used by the Employer for a variety of reasons but often related to an internal governance issue which restricts formalisation of an agreement. These scenarios include (a) lack of budget approval or (b) that the approved budget is insufficient to cover the incremental scope of works or (c) that the definition of scope of works is evolving. Letter of intent is often a way of overcoming these hurdles by allowing works to proceed whilst resolving these administrative constraints.

Given the above, the general premise of letter of intent is that the bottle neck is rarely due to outstanding agreement on commercial details or pricing matters. If these were indeed the issues in hand, parties could have entered into a remeasurement contract or to adopt provisional quantities so as to reduce risks to both parties by incorporating commercial flexibilities. Additionally due to the extensive use of standard conditions of contract across the industry, it is unlikely for parties to have significant disagreement over contract conditions. There is a fairly extensive corpus of precedents supporting the interpretations of these standard conditions which reduces uncertainty.

As a result of these likely background circumstances, the contractor should as far as possible include unit rates and pricing breakdown on any tentative scope of works included in the letter of intent for a few reasons. Firstly, this facilitates quantification of quantum meruit claims. Secondly, these provide basis for any interim progress payments. Lastly, it serves as an indicative contract sum for the procurement of construction related insurances such as contractor’s all risk insurance, workmen compensation insurance policy etc. In fact for reasons that will be elaborated in the next section of this article, the effort to draft a letter of intent is not significantly different from that of letter of acceptance. Given that most essential terms governing the scope of works are practically in place, it is in the interest of contractor to at least shape the letter of intent as closely as possible to an interim agreement.

Letter Of Intent vs Letter Of Acceptance

Letter of intent in its purest form signify the absence of a legally binding agreement between parties. It is customary for phrases such as ‘subject to contract’ or ‘subject to formal agreement’ to be used in letter of intent to indicate that neither party intends to be bound by a legally binding document until such time negotiation is completed. Letter of acceptance on the other hand is the complete opposite where it signifies the Employer’s acceptance of the contractor’s offer, thus the formation of a legally binding agreement. In an ideal world, there should be no confusion whether or not a binding agreement exist between the parties. Reality however consists of shades of grey rather than black and white. This is because under common law, courts have adopted doctrine of ‘certainty of essential terms’. In general for an agreement to be enforceable it requires reasonable certainty of essential terms as opposed to absolute clarity and precision on every term of agreement. It follows that where the letter of intent encapsulates ‘essential terms’ and its meaning are sufficiently clear, the courts may imply other remaining terms or adopt reasonable interpretation to cure any ambiguity or vagueness based on context, industry practice and any previous transactions between the same parties. Therefore the metaphorical line separating a letter of intent from letter of acceptance can be blurred.

In construction industry, even in the absence of a ‘standard template’ for letter of intent there are fairly comprehensive details stipulated in such letter purely out of necessity. These include amongst others, (1) identities of parties (2) general description of intended scope of works, (2) provisional construction costs, (3) list of drawings (4) list of specifications (5) progress payment arrangements (6) rights to vary or alter scope of works (7) additional compensations for varied works (8) construction period (9) delay damages etc. These are considered fundamental provisions for any typical construction works without which there may be considerable difficulties to manage the works, regardless of the letters or documents used by the parties. The contractor at the very least will need to be certain of what is to be constructed and the budgetary allowances to allow it to procure the relevant materials, labourer, plant and equipments to execute the works including the relevant timeline. Admittedly most letter of intent are intentionally brief, therefore parties typically include abbreviated provisions or simply make reference to the fuller provision set out in their intended standard forms of contract e.g. SIA Building Contract, PSSCOC etc. In case of vagueness arising from these abbreviated provisions, the courts may cure such ambiguity in interpretation by making reference to standard conditions.

The above mentioned fundamental provisions, or at least part of it should qualify as ‘essential terms’. Given the common practice of using standard conditions of contract in construction industry, there is a reasonable certainty in meaning of these essential terms even in an abbreviated form. In other words, the court is not required to re-write a contract for the parties by second guessing their commercial intentions. This phenomena is perhaps quite unique to construction industry. Therefore there is a good chance that letter of intent may represent a legally binding and enforceable contract at least on an interim basis, quite a departure from its purest form.

The letter of acceptance is usually a contracting step taken by the parties prior to the compilation of full contract document. Again, this is quite a unique contract management feature of construction industry. A related article published on this website with the title of ‘Process of Compiling Construction Contract Document’ is available for reference and context. In essence whilst parties formally enter into a legally binding and enforceable contract via letter of acceptance, most of the components or sections of the contract document are only referred to in the letter of acceptance. Documents such as specifications, standard conditions of contract, contract drawings, list of correspondences etc are not physically attached to the letter of acceptance but deemed part of the construction contract by way of reference. In fact most contract sum stipulated in letter of acceptance have allowances for certain scope of works that are not fully developed at the point of contract and are therefore classified under ‘Provisional Sums’ or ‘Prime Cost Sums’. In other words, the list of contract drawings and specifications referred to in the letter of acceptance do not necessarily encompass the full scope of works under the contract. This is why there are standard mechanisms to supplement the definition of scope of works by way of ‘instructions’ during the construction period. These features are important when comparing letter of intent and letter of acceptance because it illustrates the fact that the general premise of these two documents are not radically different. Neither document encapsulates the full scope of works and does not contain the entire detail to support the indicated contract sum. Additionally much of the supplementary documents are included by reference. Therefore letter of intent and letter of acceptance are largely similar in terms of the essential terms and its certainty. This also underscores why the effort to put together a letter of intent is not too different from that of letter of acceptance.

Types Of Quantum Meruit Claim

Based on the preceding sections of this article it appears that when letter of intent is used, depending on the content of such document it could either mean that there is no binding contract between parties or that parties have entered into a binding agreement albeit only with certain essential terms. Under both scenarios, the contractor is entitled to payment for work done regardless of whether a contract is in place albeit under different basis of claim. It is therefore important to understand the types of payment claim available under both scenarios. It bears repeating that this discussion is also relevant in the absence of letter of intent where parties purportedly discussed construction costs and intended scope of works via emails, orally, text messages etc without ever formalising an agreement. Under such unstructured approach, the court may either find the existence of a contract without agreement on final price or that parties fail to arrive at an agreement. Similarly the contractor may still be entitled to recover compensation for work done although legal basis for claim differs under both scenarios.

Under both scenarios, the contractor may seek compensation based on the doctrine of quantum meruit. The term ‘quantum meruit’ is a Latin expression which means ‘the amount he deserves’ or ‘what the job is worth’. In general the contractor may advance quantum meruit claims either on (a) contractual basis or (b) under restitutionary grounds. The former is applicable where a binding contract exist but the court held that there ought to be an ‘implied term’ under such contract that a reasonable sum shall be paid by the Employer. There are also circumstances where the court finds that there ought to be an ‘implied contract’ between the parties. The contractor is required to satisfy the court through the ‘officious bystander test’ or ‘business efficacy test’ that such implications are necessary and just.

The restitutionary quantum meruit claim is applicable in the absence of any contract whether express or implied, where the contractor could rely on the law of unjust enrichment by making claim under restitution. Such restitutionary claim has in the past been known as ‘quasi-contract’ claim. In general the contractor is required to satisfy the following four conditions i.e. (1) the Employer has received benefit or enriched, (2) such enrichment is at the expense of the contractor, (3) it is unjust to allow the Employer to retain such benefit, (4) there are no defences available to the Employer. Unlike contractual claim, restitutionary claim is not subject to the typical time bar under Limitation Act. However, restitutionary claim cannot co-exist with contractual claim such that it contradicts parties’ agreed bargain. Therefore parties to an existing agreement could not selectively relieved themselves from their contractual obligations when it is more advantageous to exert their rights in other legal avenues.

Most construction practitioners are not necessarily familiar with the types of quantum meruit claims and whether it is on a contractual or restitutionary basis. These are often left to their lawyers to ‘sort out’. However it is important to note that these are key concepts in understanding a party’s ‘cause of action’ under law. It is an important legal basis that connects the alleged wrongful action to the availability of remedy. These should be taken into consideration in any administration of construction contract since the types of legal tests differ and therefore may require different sort of evidence. A large part of contract administration is essentially about preservation of evidence as well as right to claim.

Letter Of Intent Under Security Of Payment Act

As pointed out in the introduction of this article, Section 4 of SOP Act requires existence of ‘contract in writing’ before the contractor as the claimant could avail itself to statutory adjudication rights. Therefore since letter of intent in its purest form indicates the absence of an agreement, the contractor should theoretically not be able to benefit from the SOP Act. However, as pointed out in various parts of this article, letter of intent may be construed as an interim agreement with essential terms and could qualify as ‘contract in writing’ under Section 4 given the broad legal definition. Therefore the contractor could still exercise its rights under SOP Act under the right circumstances notwithstanding the use of letter of intent. Such determination is usually fact sensitive.

Another notable risks of using letter of intent with limited or no clarity in interim progress payment provision is that it creates unnecessary confusion in contractual date for service of payment claim. Most construction projects are financed via interim progress payments based on work done, regardless of whether parties use letter of acceptance or letter of intent. Contractors are typically not expected to have a sustainable project cashflow without progress payments. Therefore contractors generally issue payment claim on a monthly basis either on a prescribed date or duration within the concerned calendar month. Whilst date for service of payment claim may be dismissed as more of an administrative issue, such date is actually crucial due to its domino effect under SOP Act. Such domino effect is highlighted in the ruling of Asia Grand Pte Ltd v A I Associates [2023] SGHC 175. There is a sequence of defined events culminating in the rendering of adjudication determination. These events are: (1) payment claim, (2) payment response (3) dispute settlement period (4) notice of intention to adjudicate/ apply for adjudication (5) appointment of adjudicator (6) adjudication proceedings/ rendering of adjudication determination. Every event has a maximum allowable duration and the subsequent event usually commences upon the fulfilment (or deemed fulfilment) of prior event. Therefore if timing of issuance of payment claim violates prescribed timeline, it may trigger a ripple effect down the chain of events potentially resulting in the adjudication determination being set aside due to either premature or belated occurrence of the intervening events. The contractor is particularly vulnerable to violating such timeline if the progress payment provision in the letter of intent is either vague or silent on the date of service of payment claim. Timeline violation under SOP Act can be consequential in jeopardising the jurisdiction of the adjudicator as well as enforceability of adjudication determination.

By way of illustration, let us use a similar set of facts under Asia Grand Pte Ltd v A I Associates [2023] SGHC 175 to illustrate this domino effect. Although this case does not involve the use of letter of intent, the facts remain relevant particularly when parties have vague, overly abbreviated or total silence on interim progress payment provision. Where the claimant chooses to serve its payment claim on say 10 November 2022 due to lack of prescribed service date or duration, should the ensuing 14 days deadline for issuance of payment response commence on 11 November 2022 or other dates within the same calendar month? One party may argue that such deadline commences on 11 November 2022 since it correspondingly affect the deadline for filing of statutory adjudication. The counter party (respondent) may aver that the date of service of payment claim should be deemed the last calendar date of the concerned month i.e. 30 November 2022 since this provides an alternative deadline for payment response and accordingly give rise to a more favourable due date for filing of statutory adjudication. Whether or not the statutory adjudication was filed on time affects the enforceability of the adjudication determination. The court held that where there is no express stipulation on the service date of payment claim, the deemed date of service of payment claim shall be on the last calendar day of the concerned month i.e. 30 November 2022 based on reading of Section 10(2)(a)(ii), Section 10(3)(b) of SOP Act and Reg 5(1) and 5(3) of SOP Regulations.

It is evident from the illustration above that certainty in provisions clarifies parties’ obligation thus significantly reduces legal costs in pursuit of any contractual remedy. Therefore stipulations that may initially appear as an administrative issue could have far reaching commercial implications. In other words certain details such as service date of payment claim is important to be included in letter of intent particularly in light of the SOP Act.

How To Value Quantum Meruit Claim?

Although the expression of ‘quantum meruit’ in general means ‘the amount he deserves’ or ‘what the job is worth’, what amount is deemed deserving or what is the worth of a specific scope of works can be highly subjective. Valuation is often an art rather than science. Can quantum meruit claim exceed any amount indicated in the letter of intent or such indicated amount serves as ‘upper limit’ of amount recoverable? Should the quantum meruit claim be based on cost actually incurred by the contractor, including reasonable overhead and profit or should it be based on comparison with a quotation from an alternative contractor for the concerned scope of works? Does it need to be based on the contractor’s cost or the value to the Employer? If the contractor’s price included significant profit level, should parties be held to their bargain in assessment of such claim?

In reality when an arbitrator or judge attempts to determine such compensable amount, the term often used is ‘reasonable’ without any prescriptive methodology but guided by professional opinion adduced by quantum expert(s), if any. It also often include any defects established by the respondent to reflect any diminution in amount recoverable. In any case, the more commercial details are included in the letter of intent the greater likelihood that reference will be made to those details in the ensuing valuation process. By contrast, where pricing and commercial details are lacking or incoherent, the judge or tribunal will have greater latitude in determining what should be the ‘reasonable’ compensable amount. In the case of Eng Chiet Shoong anor v Cheong Soh Chin anor [2016] SGCA 45, it was held that as regards quantum meruit claim, ‘contractual approach’ should take precedence over ‘restitutionary approach’ where both approaches could possibly be adopted. In other words, although valuation could be based on costs incurred by the provider, value derived by the recipient, price agreed by the parties or anything in between, the more the parties could agree the lesser the scope of uncertainty.

To this end as regards the commercial structure of letter of intent, there ought to be as many unit rates as possible not just for existing scope of works but also anticipated variations. This is because scope of works tend to evolve during the construction period, and therefore variations should be deemed part and parcel of risks management. As letter of intent tends to be brief, reference ought to be made to a separate list of agreed unit rates to reflect the agreement between parties as well as basis of any indicative construction costs.

Conclusion

Just because parties for a variety of reasons are not ready to enter into a formal contract, it does not mean that parties are not ready to be in dispute. These contentions are not necessarily exclusive to breach of contract conditions. Parties are in fact more vulnerable to such conflicts when the nature of their relationship is uncertain. Fortunately rights to compensation via quantum meruit claims generally exist even when there are doubts over the existence of contractual relationship. Regardless of the legal outcome of whether parties have formal agreement, they will be well served to commercially administer the project as if contract exists by reference and inclusion of every necessary pricing details. After all these pricing details are already in place to derive the sum indicated in the letter of intent. Although there are legal recourse for payment in the absence of contract, what is equally important is the ability to influence the valuation of amount payable.



Koon Tak Hong Consulting Private Limited