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Construction Update: Letters of Intent – A Word of Caution

10 July 2017

The Irish courts have a history of incorporating certain terms into construction contracts. Lynch Roofing Systems v Bennett & Son Limited [1999] 2 IR 450 and McCrory Scaffolding Limited v McInerney Construction Limited [2004] 3 IR 592 are two examples of circumstances where arbitration agreements were incorporated by reference and by habitual dealing respectively. Two recent decisions in the United Kingdom, even though of only persuasive authority, provide additional reasons for caution to builders, developers and construction professionals in Ireland when negotiating contracts and commencing works by way of letters of intent.

Arcadis Consulting (UK) Ltd v AMEC Ltd [2016]

This case raised two principal questions:

  1. whether or not the parties had entered into a legally binding contract in connection with the design of a car park, and
  2. whether the parties had agreed to cap the liability of the claimant.

Formation of a contract

The claimant, Arcadis Consulting (UK) Ltd (“Arcadis”), was employed by the defendant, AMEC (BSC) Ltd (“AMEC”), in connection with two large projects in anticipation of a wider agreement between the parties, which never materialised. The work was completed by Arcadis by way of extensions to the financial limits agreed under a series of letters of intent sent to Arcadis by AMEC. Work on one of the projects, a car park, turned out to be defective, resulting in the car park having to be rebuilt costing tens of millions of pounds.

Mr Justice Coulson held that a simple contract was created, and noted, that in normal circumstances, arrangements evidenced by letter of intent are a form of simple contract. Mr Justice Coulson commented that the substantial amount of work completed on the basis of instructions given to Arcadis by AMEC, which was in turn accepted by Arcadis, was a key factor in holding that a contract had existed. There was also no attempt to insert “subject to contract” in any correspondence.

Limitation on liability

After deciding that a simple contract was in place between the two parties, Mr Justice Coulson held that there had been no final and unqualified expression of agreement to the terms proposed by the other party in the course of negotiations. These negotiations involved exchanging significant amounts of documents in an attempt to agree to detailed terms and conditions. Mr Justice Coulson held that acceptance of proposed terms must be clear and unequivocal and that they had not been identified, were not accepted or were incomplete.

The effect of the above analysis was that the parties had not agreed any cap on the liability of Arcadis, despite the fact that every set of proposed terms of appointment discussed by the parties contained some form of cap. Failure to reach agreement on any cap on liability had the consequence that no limit was placed on the liability of Arcadis. Although the Court described this outcome as “harsh”, this provides a stark reminder of the need to ensure that agreement is reached on a cap on a contracting party’s liability. This is essential as a failure to reach agreement may result in a court concluding that there is a contract between the parties but that the contract does not contain any cap on the liability of the parties.

Further examples of missing key terms from a letter of intent

The above provides an example of terms that can be missed, inadvertently or otherwise, in a letter of intent. Another example of this was seen in Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012]. The High Court considered whether a project management company was at fault by proceeding with a project without putting a formal contract in place with the contractors. The project was significantly delayed and a dispute arose with the contractors, Kier, as to liability for liquidated damages in the sum of £750,000. Kier relied on the fact that no building contract had been entered into and negotiated a settlement whereby the claimants and Kier did not pursue each other for any further sums or damages due to the delay.

The claimants commenced proceedings against the defendants. They argued that the defendants were liable for allowing all of the works to be undertaken by Kier in the absence of a building contract expressly incorporating liquidated damages for delay. The claimants argued that the defendants had failed to exercise reasonable care and skill or to comply with the standards and practice of the construction industry. The Court described a project manager as the representative of the employer for the purpose of co-ordinating the different aspects of the project, who must act as a guardian of the client's interests. 

The Court held that by proceeding on the basis of a letter of intent only, the defendants put the claimants at real risk because there were no detailed provisions covering the works and, in particular, no agreed provision for compensation in the event of a delay. The Court ordered the defendants to pay damages.

Spartafield Ltd v Penten Group Ltd [2016] EWHC 2295

The Court went a step further in this case. It held that a contract had replaced a letter of intent, despite the fact that the contract had not been properly executed.

During the tender process, the JCT Intermediate Contract with Contractor’s Design 2011 was identified as the form of contract. Once the tender had been awarded, works were authorised up to the full contract sum. Although the majority of terms were agreed, Penton did not sign the contract as there were fears concerning delays in completing the works. Costs exceeded the contract sum, and Penton sought to rely on the letter of intent to wind down the work. Spartafield argued this termination was unlawful. It argued that all essential terms of the contract had been agreed, and the conduct of the parties was consistent with the performance of the JCT contract.

The letter of intent anticipated a formal contract being entered into in due course, but did not impose a condition that this contract had to be formally executed, and all key terms had been agreed. The Court held that the JCT contract applied and the cessation of works by Penton was unlawful.

UK Supreme Court interpretation

This mirrored the approach taken by the UK Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Müller [2010]. In that case, it was held that a written contract between the parties was in existence in the form of draft text that was never executed. The work commenced on the construction project in question on the basis of a letter of intent. The letter of intent had a term of two months, which was subsequently verbally extended for a further two-month period. The total price had been agreed and instalments had been paid to the contractor. In the Court’s view the essential terms had been negotiated and concluded in correspondence between the lawyers on each side.

Conclusion

Arcadis and Spartafield were both decided in October of last year. These two contrasting decisions show that the meaning and effect of the term ‘letter of intent’ will depend on the circumstances of each case. They are only of persuasive authority in Ireland and the approach to contractual interpretation in Ireland means that the Courts will ascertain the intentions of the parties from: (i) the language used, considered in light of the surrounding circumstances; (ii) the factual matrix; and (iii) the object of the contract.

A well-drafted letter of intent is often the pragmatic solution on a project where the early commencement of work takes priority over the conclusion of a final contract. However, it is important that the commercial intent of the parties is clearly drafted and appropriate advice is obtained.

For more information relating to building contracts, please contact a member of our Construction team.


The content of this article is provided for information purposes only and does not constitute legal or other advice. 

Discuss your construction law queries now with Eoin Cassidy.

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