Lawyers will always caution against the use of letters of intent, however, these are widely used in the construction industry. Whilst the risks associated with using letters of intent are well known, there are good practical reasons for their use so work is not delayed while the building contract is being negotiated. The recent case of The Trustees of Ampleforth Abbey Trust v. Turner & Townsend Project Management Ltd [2012] EWHC 2137 (TCC) illustrates the limited protection offered by letters of intent and that parties using them should ensure the building contract is executed as soon as possible. Losing focus on finalising the building contract once work has started could be a costly mistake should issues arise on the project.

The project

The claimants in this case were a Trust involved in the furtherance of education at Ampleforth College. The defendants acted for the Trust as a project manager in relation to the construction of new boarding accommodation at the college. A dispute arose in relation to the third of these projects, where the contractor completed the works significantly later than planned. The contractor claimed additional time and payments in respect of the delay and the Trust claimed liquidated damages of £750,000. A mediation of the dispute took place and the matter was settled on terms that the contractor did not get additional time/costs and the Trust did not get any LADs.

The dispute

The court had to decide whether the project manager was in breach of its duty of care to the Trust in failing to procure from the contractor an executed building contract. In this case the works were carried out under letters of intent that were issued periodically. The building contract referred to in the letters of intent was not executed until after the works were complete and on terms, agreed at the mediation, that the Trust’s entitlement to LADs was excluded.

The Trust made a claim against the project manager for damages for professional negligence. The Trust argued that the project manager should have ensured that the contractor executed the building contract. The Trust argued that, had the contract been executed, it could have claimed LADs from the contractor and secured a more advantageous result in the dispute.

Duties of the project manager

In this case it was found that the project manager owed the Trust a duty to exercise reasonable skill and care in order to procure an executed building contract from the contractor. It was found that the project manager was negligent in that it failed to take steps to finalise the contract that were reasonably required of a competent project manager. It was the project manager’s duty “to exercise sufficient focus on the matters holding up execution of the contract or to exert sufficient pressure” on the contractor to ensure the contract was finalised.

In this case, it was found that the project manager’s duties included “facilitating, assisting and being involved in the procurement of the building contractor and the building contract”. The judge found that the project manager’s role in finalising the contract was of “central importance”. He went on: “The execution of a contract is to be seen not as a mere aspiration but rather as fundamental. It is the contract that defines the rights, duties and remedies of the parties and that regulates their relationship.” By contrast letters of intent “do not protect, and are not intended to protect, the employer’s interests in the same manner as would the formal contract”.

Two points were key:

  • It was unusual for a project of this scale to be carried out entirely under letters of intent.
  • The project manager treated the execution of the building contract as “a dispensable luxury”. Repeated letters of intent were issued rather than ensuring the contract was finalised.

In this case, the court was of the view that the project manager should have advised the Trust that repeated letters of intent were inappropriate and that it should have focused on the outstanding issues that were holding up the finalisation of the contract.

What was the Trust’s loss?

The judge was of the view that, if a contract had been in existence with an enforceable LADs provision, then in all probability the Trust and the contractor would have negotiated a settlement of £340,000. The judge then determined that the Trust was entitled to two thirds of this sum to take into account the chances of the contractor actually agreeing and signing the contract (£226,667).

Standard terms

The project manager’s terms contained a limitation of liability clause but the judge was of the view that it could not rely on this clause. Under this clause, liability for negligence was limited to the lesser sum of the fees paid to the project manager or £1 million. The project manager had acted for the Trust on previous projects under standard terms with a higher limit on liability. The lower sum in these terms and conditions was not highlighted to the Trust and as such the judge felt there was force in the argument that it was wrong for the project manager to seek to introduce this new term “without specific notice or any discussion”. The judge found that the limitation clause was unreasonable due to the contract requiring professional indemnity insurance to be maintained at a level of £10 million. The cost of the insurance would most likely be passed on to the Trust within the project manager’s fee yet any claim would be limited to the fees payable to the project manager (£111,321). With no explanation for this, the judge was of the view that this term was unreasonable. Consequently, the project manager was unable to rely upon the limitation of liability clause.

Lessons learnt

Parties are often keen to get projects started and, in this case, there was an urgency to get the project under way so that the accommodation could be used by students. In these circumstances, agreeing to a letter of intent is often preferable to delaying works further until the building contract is negotiated and finalised. However, once works have started parties should be careful not to lose sight of the negotiation and finalisation of the building contract and should ensure this is done at the earliest possible date. The importance of the building contract is often underestimated until an issue arises. It is at this point that a carefully considered and negotiated contract can assist in the resolution of disputes. Where there are still outstanding issues in relation to negotiations, parties should focus their efforts on resolving these at the earliest opportunity. Regular meetings should be held and progress monitored with an agreed deadline for parties to agree the final contract. Relying on letters of intent opens parties up to risk. Whilst this can be managed for a short period to some extent, continued use of revised letters of intent is a poor substitute for a carefully negotiated and comprehensive construction contract.