In construction matters, where time and money are often on the line, it is not uncommon for a contractor to begin construction work before a contract has actually been put in place. Particularly where the Works are time critical, the parties may often proceed on the basis of a Letter or Intent (LOI) which acts as a temporary measure whilst a full building contract is put in place. The pitfalls of proceeding on the basis of a Letter of Intent and forgetting about the Building Contract is a subject which has attracted a great deal of column inches, including on our very own website, where we commented on a previous case here.

The dangers of doing so have once again been the subject of a decision of the Technology & Construction Court, with the recent case of Trustees of Ampleforth Abbey Trust v Turner and Townsend Project Management Limited 2012 EWHC 2137 (TCC). For the first time, the Court has found a Project Manager liable for professional negligence for failing to take sufficient steps to have a building contract executed.

Facts of the Case

Turner & Townsend Project Management (TTPM) were employed as Project Manager by the Trustees of Ampleforth Abbey Trust (The Trust) on a project to provide boarding accommodation for the Ampleforth College. There was an urgency as the accommodation was required by students for the beginning of the academic year.

On TTPM's advice, the project commenced based on a LOI. So far so good. However, rather than pushing for early execution of the Building Contract, TTPM continually issued further Letters of Intent. In the end, the Building Contract was not executed until long after the works were completed at a mediation between the parties.

Delays to the project meant that the Works were completed significantly later than the start of term, and well after the original completion date. Students had no accommodation to move in to and the Trust had to find suitable alternative accommodation. These kind of costs are exactly why formal Building Contracts have provisions for Liquidated Damages and the draft contract attached to the first Letter of Intent put these at £50,000 per week. However, there was no formal contract to turn to. The Letters of Intent did not incorporate the draft terms- in fact they specifically stated that neither party would be bound by their terms until execution of the formal contract. No Liquidated Damages were due and the Trust found themselves significantly out of pocket. The Trust held their hand out to TTPM, alleging that it was their obligation to procure the formal contract and their failure to do so had cost the Trust a sizeable loss.

The court’s decision

The Court decided that TTPM did owe the Trust a duty to exercise reasonable care and skill for the purpose of procuring from the Contractor an executed building contract and that it was in breach of that duty. There were several interesting elements of the judgement, with the Court holding that:-

  • As "co-ordinator and guardian of the client's interests", TTPM had failed to exercise "sufficient focus" on the matters holding up the execution of the contract and ought to have exerted "sufficient pressure" on the Contractor to finalise the contract;.
  • TTPM's breach of their duty of care to the Trust caused the Trust loss. If there had been no such breach of duty and TTPM properly advised the Trust, there was a "real and substantial chance" that the Contractor would have executed a contract which had a provision for Liquidated Damages;
  • The Trust could recover two thirds of the amount due, having regard to the size of the chance that the Contractor would have actually signed the contract; and
  • TTPM could not rely on a clause in their appointment limiting their liability to either the fees paid to them or £1million, whichever is the lesser. This clause, which would have limited liability to £111,321 was "draconian" when considered against the requirement to maintain PI insurance at a level of £10million contained in the same document. The limitation was therefore unenforceable.

Conclusions

This case once again highlights the need to use Letters of Intent only for their intended purpose and ensure the execution of a formal contract as soon as possible thereafter. Letters of Intent will continue to play a role in construction projects, but they ought to be used only for their specific, temporary purpose. As the judge in this case stated, Building contracts are "precise, detailed and structured documents that define the rights, duties and remedies of the parties" and Letters of Intent are "contracts of a skeletal nature whose classic use is for restricted purposes that do not protect the employer's interests in the same manner as would the formal contract." Project Managers in particular will be aware more than ever of the importance of ensuring that the former document is put in place.