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Letters of intent – construction industry

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Letters of intent are a common occurrence in the construction industry. But they could prove to be riskier than you might expect.

The intention of letters of intent for construction projects

Given the time pressures in the fast-moving world of construction, it’s not unusual for projects to get underway before negotiations with the chosen contractor have been completed and the Building Contract has been signed. In this situation, a letter of intent often bridges the gap, enabling contractors to get a head start on a project.

However, in situations where a final contract fails to be signed, does the letter of intent then create a contractual relationship in its place? And what does that mean for both parties involved?

They may find that, if terms aren’t agreed before work begins, letters of intent can increase the risk of legal disputes, rather than reduce them.

Arcadis Consulting (UK) Ltd v AMEC (BSC) [2018] EWCA Civ 2222

This can be seen in the recent case of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd. Amec was a specialist concrete sub-contractor on two projects - the Wellcome Building and the Castlepoint car park. AMEC engaged Arcadis to carry out structural design works for both projects, issuing a letter of intent instructing Arcadis to begin work. However, no formal contract was ever signed or executed.

Unfortunately, the Castlepoint car park developed serious faults, with the concrete both cracking and falling off, resulting in the possibility that it would have to be rebuilt, at a potential cost of tens of millions of pounds. The sub-contractor believed the liability for the issues was with Amec. Amec subsequently alleged that the liability for the works was with Arcadis.

Arcadis argued that, while it wasn’t liable for the structural issues, even if it was, its liability would be capped to around £600,000. This liability cap was based on a number of different contract documents, including numerous letters of instruction, which had been sent between the two parties but never signed. Amec, meanwhile, argued that no contract had been formed at all.

A judge at the Technology and Construction Court (TCC) ultimately rejected this, holding that a contract did exist between the two parties; given that the work had been carried out and completed, a contract had been formed. However, he also ruled that, because Arcadis’ anticipated liability cap had not been accepted by Amec, the contract didn’t include such a term and that, therefore, Amec could pursue Arcadis for the full amount of the damages.

Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137

The case of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137 also highlights the perils of relying on a letter of intent. In this case, the Claimant pursued a claim against a project management company that it had appointed to manage the construction and development of the project. The Court held that the project manager had breached the duty of care owed to the Claimant by allowing the project to proceed based on a number of letters of intent. The Court found that the project manager had a duty to use reasonable skill and care to put in place an executed Building Contract between the Claimant and the Contractor, which it failed to do. This failure resulted in the Claimant being placed at a disadvantage in its claim against the contractor, since there was no formal Building Contract in place between the parties.

The Court held that the execution of a contract is to be seen not as a mere aspiration but rather as fundamental, and in contrast, letters of intent are a contract of a skeleton nature which pave the way for a formal contract.

Avoiding letter of intent pitfalls

As these cases demonstrate, carrying out work before a formal contract, containing all the terms agreed, has been finalised and executed, comes with potential risks. A contract may be considered formed, regardless of whether the parties intended to draw up and sign a detailed agreement in the future.

We would always recommend getting a contract signed before work begins and that, ideally, construction should not start until a final agreement has been signed and executed. However, we are aware that this is not always practical in the fast-moving construction industry. So, when engaging a contractor under a letter of intent, employers should ensure that the contractor’s express agreement to the terms and conditions is formalised. They should seek to layout the scope of instructions, and obtain a counter-signature from the contractor, thereby entering into an initial binding contract.

It’s also important that parties aren’t swayed by any ongoing negotiations regarding the Building Contract and it’s vital that key issues, such as liability caps, are specified and agreed to. These terms and conditions should be drafted with care, and accepted with certainty.

If you have any questions about letters of intent and would like to talk to someone on our Construction Team, please get in touch via the team page.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.