The legal nature of letters of appointment

The legal nature of letters of appointment
10 Jun 2021

Letters of appointment indicate an intention to conclude a contract. In the construction industry, letters of appointment are issued following a procurement process. However, this can be troubling considering that parties are able to depart from any condition stated in the letter of appointment, including any suspensive condition that it may contain.

This became evident in a recent judgment of Municipality of Mhlontlo [Appellant] and TDH Tsolo Junction Pty Ltd [Respondent] (1086/2019 ZASCA 3), in which the court considered the legal nature of letters of appointment.

The appellant invited bidders to submit proposals for the development of property. The respondent submitted a proposal and was appointed by the appellant, by the issue of a letter of appointment, which contained several conditions that the respondent needed to comply with.

In particular, the respondent was required to deliver several documents, including a construction guarantee, occupational health and safety plan and proof of insurance. The respondent did not submit any of the aforementioned documents. In negotiations, the respondent stated that it believed that these documents were not necessary for purposes of the project. The parties then concluded a contract in respect of the development of the appellant’s property.

The respondent claimed (in the court a quo) that the appellant breached the contract and thus the respondent suffered damages in the amount of R48 340 059. This claim was upheld by the court a quo and the appellant approached the SCA to appeal the decision.

On appeal, the appellant alleged that the contract in terms of which the respondent was claiming the damages never came into effect due to the non-fulfilment of the conditions stated in the letter of appointment.

These submissions were rejected by the SCA. The court held that during the negotiations the parties agreed that the documents stated in the letter of appointment were not necessary. Further the contract contained no references to the letter of appointment. More importantly the contract contained a non-variation clause.

The appeal was accordingly dismissed.

It is clear that the above factors were critical to the SCA arriving at its decision.

Letters of appointment indicate an intention to conclude an agreement. In fact, in most instances, they state that the parties shall negotiate and conclude a contract for the work to be executed. Letters of appointment, in of themselves do not constitute the agreement between the parties and the parties can depart from any condition stated, including any suspensive condition that they may contain. Employers or project owners should be very careful when relaxing conditions stated in the letters of appointment and decisions should be made while having due regard to why the conditions were a requirement in the first place.

It is of course to be noted that each case will be judged on its facts. However, the principle to be taken is that a letter of appointment is an intention to conclude a written or oral contract. Of course, the latter is very rare in construction projects.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Khaya Mantengu
Khaya Mantengu

Khaya Mantengu has acted for clients in several sectors, including public and state companies and private parties involved in infrastructure projects, such as ports, dams, power stations, toll roads, hospitals... Read more about Khaya Mantengu

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