Letter Of Intent Case Study

Intent or not, the Letter of Intent (LoI) is not intended as an alternative to a binding contract where the parties have clearly expressed and agreed their terms.

Picture the situation: the Employer is after a start before contract negotiations are complete and the Contractor is after an element of security via some form of payment for the work being undertaken outside a formal contract. An all too familiar scenario, occurring far too often and way beyond the legal parameters it may have been intended. As such the topic matter is worthy of a closer scrutiny.

Although the LoI is a legal document – viewed as a form of contract – its drafting is of great importance if it is to be viewed as a binding agreement. One of the key points to bear in mind when drafting a LoI is the clarity of intention. Basic requirements such as setting out the exact scope of the works, how the Employer wishes to pay the Contractor, how long is the document valid for and how do all these parameters sit within the proposed Contract that is intended to be subsequently signed have occupied court time extensively. Lord Clarke, in a recent case RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG has provided the best sound advice to date: “The moral of the story is to agree first and to start work later.”

What you choose to agree, forming the content of your interim agreement described in the LoI, will determine whether that arrangement is binding or non-binding. The courts will, in the first instance, look to see whether the features present in the interim agreement are that of a contract. Lord Clarke in the RTS Flexible Systems case above set out the general principles as: “Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed ... upon consideration of what was communicated between them by words or conduct”. So, the certainty of key terms, some indication as to what issues are yet to be resolved before the proposed Contract is entered into, a maximum cap on the amount to be paid to the Contractor under this agreement and duration of the interim agreement are some basic topic areas to consider.

Another express term worthy of integration into the LoI is some form of dispute resolution mechanism. The recent case of Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC) demonstrates the importance of incorporating such term into the parties’ agreement. The High Court granted the Claimant an injunction to restrain the Respondent from pursuing adjudication on the grounds that the LoI did not incorporate the terms of the proposed contract (DOM/2 sub-contract) which was relied and acted upon for the appointment of an Adjudicator. Though on the face of it this may appear contrary to the Scheme for Construction Contract, the court viewed it from a different angle. Lord Justice Edwards-Stuart held that the validity of the Adjudicator’s appointment “goes to the heart of his jurisdiction” and unless appointed under the correct contractual procedure, the nomination and appointment will be seen as invalid.

Another recent case will help demonstrate that LoI is only a temporary arrangement, not to be taken past its “sell by” date. In Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd . [2012] EWHC 2137 (TCC) the whole of the works was carried out and reached completion under eight letters of intent. A dispute arose between the Employer and the Contractor after the work reached completion later than scheduled. The Employer was claiming for Liquidated Damages (LADs) listed in the proposed contract as £50,000 per week, not expressed in LoI, as well as denying the Contractor’s claim for additional payment. The Employer relied on the grounds set out in the LoI which stated “In the event that the intended contract is not concluded between us ... you will not be entitled to any further payment whether by way or quantum meruit or otherwise”. The Contractor denied liability and relied on the LoI stating “neither of us will be bound by the intended contract unless and until the written document is executed by us”.

This was eventually settled by mediation with an agreement that the Contractor would not have to pay any LADs and the Employer would not have to make any additional payment to the Contractor. This is where it gets interesting as the Employer, on settlement of its dispute with the Contractor, commenced proceedings against the project manager Turner & Townsend. The Court held that the project manager was liable as he had breached his duty of care, causing the employer loss by ultimately depriving him the LADs, under the JCT contract, the parties were “intending” to contract under at some point in the future which did not happen.

The use of letter of intent, within a construction context, does make commercial sense in the short term and should be seen as such before the proposed Contract is executed. It is, however, not suitable as an interim measure when the Employer and the Contractor are struggling to agree key terms of their main proposed contract.

Darya Bahram

Chartered architect (RIBA), Project Manager (MAPM) and member of the Chartered Institute of Arbitrators (MCIArb).

Letters of intent are widely used in the construction sector where the employer wants to get on with the project and does not want to, or cannot, wait until the building contract has been negotiated and signed.  

The nature of letters of intent inevitably give rise to disputes: the courts have repeatedly highlighted the inherent risks of relying on a letter of intent rather than a concluded contract. This inherent risk in letters of intent, along with the duties of project managers, was scrutinised in a recent case¹ before the specialist Technology and Construction Court this year.   The case was brought by the Trustees of Ampleforth Abbey Trust against the Trust’s project managers, Turner & Townsend Project Management Limited (“T&T”).  The works were commenced under a letter of intent prepared and advised on by T&T, on the assumption, no doubt, that the building contract would be negotiated and entered into in due course.   

The works continued. Although the building contract was under negotiation, further letters of intent prepared by T&T were issued to the building contractor. The planned date for completion came and went. Still no signed contract. 

The contractor eventually completed the works, but much later than planned. At that point Ampleforth reached for the (unsigned) contract. They wanted to be able to deduct the liquidated damages in the contract of £50,000 per week against their contractor. This would have meant Ampleforth could deduct £750,000 from monies otherwise due to their contractor for the delays. However, because the building contract had still not been concluded, the Trust could not recover those liquidated damages. It blamed T&T for failing to procure the executed building contract or warn the Trust of the risks in not getting the contract executed. 

The matter came before the courts earlier this year, with judgment given in July. The court found that T&T had been negligent by not doing enough to try and get the contract signed by the contractor. It also held that T&T were negligent in failing to provide sufficient warning and advice to the Trust of the risks in not getting the contract in place. 

This case serves as a warning for both employers and project managers. It highlights the very serious risk in not putting a building contract in place and just relying on letters of intent. In this case, serial letters of intent were issued reducing the chances that the building contractor would agree to enter into the contract.  

For project managers the case highlights the importance of taking adequate steps to try and get the building contract executed by the parties. Sometimes that may not be possible, but certainly in this case the court found that T&T had not done enough in that regard. Similarly, a project manager must warn his client of the risks of relying on letters of intent, and the consequences of not getting a building contract in place quickly enough. 

¹ The Trustees of Ampleforth Abbey Trust v Turner and Townsend Project Management Limited [2012] EWHC 2137 (TCC)

About the author

Stuart Thwaites Legal Director

Stuart is a lawyer specialising in construction and engineering work in relation to resolving disputes and in the drafting and negotiation of contractual documentation.

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