12/03/2024
An employer and a contractor want to don hardhats and get moving on site. Everybody’s stoked to start the works. The building contract has barely been spoken about. Boring details that can be sorted out later, and times-a-ticking. There may be other factors imposing a quick start other than general impatience. So employer and contractor decide to do a letter of intent. They bash out some terms and sign the letter. Works start. All is well, because we have a letter of intent, right?!
Not really, as seen in CLS Civil Engineering Limited v WJG Evans and Sons (a partnership). What happened in this case is all too familiar.
CLS engaged WJG as the contractor to build three apartments, retail and a library. WJG’s tendered sum was £945,641.33. Because the terms and conditions of the contract were still being negotiated, it was decided that a letter of intent would be entered into. The Letter of Intent expressly limited CLS’s maximum liability to £150,000. Works progressed, but the parties were at loggerheads in agreeing the terms and conditions of the building contract, which was supposed to be in the form of a JCT 2016 Intermediate Contract. However, during this time and to keep the project moving, CLS periodically agreed to increase the maximum liability under the Letter of Intent ultimately to £1,100,000. WJG then submitted a loss and expense claim, which was the straw that broke the camel’s back. CLS subsequently terminated WJG.
WJG then brought a claim against CLS for repudiatory breach of contract. In addition, WJG sought to recover its final valuation costs of £1,413,669.24, which was substantially more than the maximum liability under the Letter of Intent.
In the proceedings CLS submitted a Part 8 claim, which is the procedure used when there is minimal or no dispute of facts in a case. They claimed that Part 8 could be used because there was only a point of construction in dispute, which was whether the terms of the JCT were incorporated into the Letter of Intent. WJG asserted that Part 8 was inappropriate because there was a substantial dispute of facts and that the terms of the JCT 2016 Intermediate Contract governed the works and because of this CLS was therefore estopped from contending that the maximum liability was applicable. WJG wanted the case to proceed by a Part 7 claim, which is a slower and more expensive process. The court decided that a Part 8 claim was appropriate under the circumstances.
In the end, the court determined that CLS’s liability was £1,100,000 in line with the agreed maximum liability under the Letter of Intent. Moreover, the court held that because the terms of the JCT contract were not agreed, the Letter of Intent was not subject to the JCT’s terms.
This case is another reminder of risks involved with letters of intent and that parties need to tread carefully when using them. It’s important to agree the terms and conditions of a building contract before a letter of intent is entered into as the terms and conditions of the building contract will govern any works carried out under the letter. A clear maximum liability preferably linked to specific activities, such as placing orders or site mobilisation, and an expiry date are useful items to include in a letter of intent, if for no other reason than to encourage the parties to button up the building contract and put it in place.
