Retention & Letters of Intent (LoI) Flashcards
439 What is retention?
A percentage of the sum of money certified for payment to the contractor during the construction and defects liability periods of a contract. It is held by the Client in a separate account.
440 are you aware of any guidance issued by the RICS on retention?
Retention – 1st Edition 2012
441 What is the purpose of retention?
To withhold an amount of money from the contract in case they default on their obligations.
442 What can the employer use the money for?
Only for rectification of defects. The contractor must be given the opportunity to rectify the defects. If they fail to do so the Client or PM must issue the correct notices under the contractor to inform them, they are bringing in someone else to fix their work.
443 How is retention released to the contractor? (50)
In line with the terms of the contract. Typically 50% of the retention is released at practical completion and the remaining 50% is released at the end of the defects period.
444 Who benefits from the interest accrued?
Normally the Client.
445 Are there any alternatives to holding retention?
Yes, a retention bond is an alternative?
445 Are there any alternatives to holding retention?
Yes, a retention bond is an alternative?
- What is a letter of intent?
A letter of intent is a communication between two parties that indicates a willingness to enter into a formal written contract. There are 3 different types:
1. A comfort letter – A letter outlining the intent to act in a particular way at some point in the future.
2. Instruction to proceed and consent to spend (an “If” Contract) – a letter ask the other party to proceed and giving a limit to what can be spent while the main contract is drafted.
3. Recognition of contract – Referred to as a letter of acceptance. Used under FIDIC to formally execute the contract.
Letters of intent should have as much information in as possible:
Scope, duration, value, payment provisions, deliverables, dispute resolution route, insurance provision and statement that the Client is not bound to enter into a full written contract.
- What are the advantags of LoI?
Can mobilise the parties to start to carry out specific tasks while a full contract is entered into.
- What are the Disadvantages of LoI?
Exposes the parties to risk if the level of detail is not sufficient. Exposes the Client to financial risk if a value limit is not stated. Less robust than the main contract.
Issued by the employer.
- When might a LoI be used?
Might be used when an employer wants and initial piece of work done before a certain date and there isn’t time to agree a full contract. Where materials have a long lead time
- Who signs a LoI?
Signed by both parties.
- What would you say if a Client asked you to draft a letter of intent?
Decline, a letter of intent is a legally binding document and therefore is best drafted by a solicitor or similar.
- Case Law regarding LoI?
Ampleforth Abbey Trust V Turner & Townsend.
T & T delivered a project where they, for whatever reason didn’t make the building Contractor sign a formal contract and carried out the £750k project on a letter of intent. The works were delayed and as there was no building contract in place the Client wasn’t able to claim damages from the contractor.
British Steel Corp v Cleveland Bridge & Engineering Co Ltd
A formal contract was not entered into the and claimants end up getting paid for the work they had done quantum meruit.
