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01 February 2016

Letter of Acceptance under Montenegrin Law

In recent Montenegrin construction practice, a letter of acceptance (or letter of intent/appointment) is commonly used to enable construction to commence before a formal agreement has been executed.

Concurrently with the increased application of the conditions established by the International Federation of Consulting Engineers (“FIDIC”) to Montenegrin construction projects, particularly in the hotel and retail industry as well as infrastructure projects, the execution of formal letters of acceptance has become common in Montenegro. A letter of acceptance is a document sent and signed by the employer, which states that the offer submitted by the contractor has been fully accepted and that the contractor may , and potentially already is obliged to, begin working. After a letter of acceptance has been executed, the parties can then commence negotiating a formal FIDIC construction contract.

One may ask whether a contract between the employer and the contractor is actually effected under the letter of acceptance. Montenegrin laws, for example, do not specifically address the concept of a letter of intent (or a letter of acceptance, as it is called in the FIDIC Conditions of Contract). However, in Montenegrin and regional construction practice a letter of intent is used as a (most often inappropriate) legal basis allowing for work to commence while the main agreement is being negotiated and implemented.

Thus, under Montenegrin law, issuing an application for a letter of intent may be interpreted as an agreement (ie, acceptance of the party’s offer constitutes an agreement).

Often the main ambiguity arising from a letter of acceptance is its legal aim, ie, whether:

(i) the letter of acceptance serves as an investor’s acceptance of the offer provided by the contractor, with a commitment by the investor to negotiate and enter into an agreement on the execution of the work to be done;

(ii) the tender documentation (accompanying the letter of acceptance) already contains a form of the agreement, such that, by executing the letter of acceptance, the underlying agreement regarding the work to be performed would be deemed executed as well; or

(iii) similar to point (ii) above, the agreement on the execution of the work to be performed would be executed independently from, but simultaneously with, the letter of acceptance, so that all such documents jointly form an agreement.

One of the key legal consequences that may arise from a letter of acceptance, other than weakening the negotiation position of both parties, relates to potential claims between the parties arising in the period between execution of the letter of acceptance and the formal execution of a construction contract. It is unclear whether such claims may be resolved under FIDIC principles, with no construction contract yet in place.

In light of the above, it is advisable to prescribe the manner and timeline in which the letter of intent will be replaced with the main agreement. Also, the main agreement should contain details about the work completed up to that moment (on the basis of the letter of acceptance), what remains to be done, and the price paid for such work.

Where a letter of acceptance is used as a legal means to enable commencement of work before a construction contract has been signed, the parties should take great care about the precise legal consequences of such document.

authors: Slaven Moravčević, Ivana Panić