In the December 2006 edition of the Updater, we reviewed the case of Hart Investments Ltd v Fidler and another [2006] EWHC 2857 (TCC), which was the first reported case on the issue as to whether a letter of intent complied with the “in writing” requirements of s107 of the Construction Act.

In that case, the court applied the decision in RJT Consulting Engineers Ltd v DM Engineering (Northern Ireland) Ltd [2002] 1 WLR 2344, namely, that the whole contract,- not merely a part of it - had to be evidenced in writing, to comply with s107 of the Construction Act.

The court concluded, in that case, that the relevant paragraphs in the letter of intent did not constitute a complete record of the parties’ proposed agreement; the letter of intent did not therefore comply with s107 of the Construction Act; and Part II of the Construction Act (including its provisions for adjudication) did not therefore apply.

The issue as to whether a letter of intent will comply with s107 of the Construction Act has now been considered in a further case:

Bennett (Electrical) Services Limited v Inviron Limited [2007] EWHC 49 (TCC)

The contractor sent a sub-contractor a letter of intent which was headed “Subject to Contract”. The sub-contractor commenced adjudication proceedings. The adjudicator found that he had no jurisdiction on the grounds that there was no contract between the parties which complied with section 107 of the Construction Act.

The sub-contractor commenced a second adjudication in relation to the same dispute. The second adjudicator ruled that he had jurisdiction and decided in favour of the sub-contractor. The sub-contractor sought to enforce the second adjudicator’s decision.

Was there a contract between the parties?

The first issue was whether the letter of intent constituted a contract in writing, as required under s107 of the Construction Act. The judge held that the effect of the words “subject to contract” was that no contract came into being.

That finding was sufficient to dispose of the case. There was no construction contract under section 107 of the Construction Act. The adjudicator therefore had no jurisdiction.

However, the judge then considered what the position would be if (contrary to his finding) a contract had come into existence.

Did the letter of intent comply with the “in writing” requirements of s107 of the Construction Act?

The sub-contractor argued that the letter of intent contained all the terms of the construction contract: the work scope, programming requirements and fixed price were all identified.

The court rejected the sub-contractor’s argument. Additional works had been instructed, for which the letter of intent had no provision for price/ rates, method of assessment or timing of payment. The letter of intent also referred to a meeting at which key issues had been discussed, including mechanics of payment, variations, insurance and health and safety. These were all key matters, which had not been recorded in the letter of intent.

As a result, following the RJT case, the letter of intent did not comply with “in writing” requirements of s107 of the Construction Act.

Editors’ comments

The judge did not need to consider the contractor’s argument that the second adjudicator had no jurisdiction because the issue of jurisdiction had already been determined in an earlier adjudication. On this ground alone, it seems that the sub-contractor’s proceedings to enforce the second adjudicator’s decision were doomed to fail.

When applying the principles of the RJT case, the judge noted that a construction contract will not comply with the “in writing” requirements of section 107 of the Construction Act where written terms are complete, but “the works have been subject to significant oral variation”.

If this is correct, it follows that a construction contract which records all terms agreed between the parties and which therefore falls within the scope of section 107 of the Construction Act, may subsequently fall outside the scope of section 107, if oral variations are made. The judge, in this case, referred to the oral variations being “significant”. However, in line with the RJT reasoning, it is arguable that a contract would cease to fall within the scope of section 107 of the Construction Act if any oral variations were subsequently made. Presumably, this would be the case even if the oral variations were wholly unconnected with the subject matter of the dispute. This could be a trap for the unwary!