The Technology and Construction Court has held that a project manager must pay damages to an employer for losses suffered where the whole of the works were carried out under several letters of intent, instead of under a formal building contract.

The works were delayed and the employer could not claim liquidated damages for delay from the contractor because the letters of intent did not contain liquidated damages provisions, and the project manager had failed to procure the execution of a formal building contract. The employer settled its dispute with the contractor and then claimed from the project manager the losses it suffered, because it had settled with the contractor on less favourable terms than it would have done if the contract had been a formal building contract rather than several letters of intent.

The court held that the project manager had failed to comply with its duty to exercise reasonable skill and care in procuring the execution of a formal building contract, and that the employer would have settled its dispute with the contractor on more favourable terms if a formal building contract had been in place. The court also held that the project manager could not rely on a limitation of liability in its appointment, because the provision contravened section 3 of the Unfair Contract Terms Act 1977.

This decision is another reminder of why it is not in the parties’ interests for works to be carried out under a letter of intent, and certainly not the whole of the works, if it is possible for a formal building contract to be executed before any works are carried out.