In a recent construction case heard in the Technology and Construction Court, a project management company was held liable to pay its client damages for losses arising on a project where works were carried out under a series of letters of intent rather than a formal contract.
Given the strong parallels between construction and IT projects, the decision underlines the importance of having a formal agreement executed before an IT project commences and the dangers that project management companies may run if a contract is not concluded.
In Ampleforth Abbey Trust v Turner & Townsend Project Management Limited, the Trust engaged TTPM (the project manager) to act on its behalf on the building of a new boarding school. The Trust and the building contractor agreed a letter of intent drafted by the project manager to allow work to commence while the final design was being completed and, in all, there was a series of eight letters of intent entered into by the parties (but no formal contract) by the time the building works were completed.
The Trust and the contractor became involved in a dispute: the Trust claiming liquidated damages for late completion whilst the contractor denied liability on the basis that, although the draft contract contained a term allowing £50,000 damages per week of delay, the agreement had never been executed.
The relevant letter of intent stated that:
“neither of us will be bound by the intended contract unless and until the written document is executed by each of us”.
The Trust and contractor eventually settled their dispute after mediation and the Trust then began proceedings against the project manager. The gist of the action was that the project manager had been negligent in that it had failed to obtain an executed building contract which would have allowed the Trust to claim liquidated damages against the contractor. The project manager denied this claim on several grounds, one of which was that its appointment included a limitation clause capping its liability:
“liability for any negligent failure by Us to carry out Our duties under these Terms shall be limited to such liability as is covered by Our Professional Indemnity Insurance Policy terms.... and in no event shall Our liability exceed the fees paid to Us or £1 million, whichever is the less”.
The fees paid to the project manager were just over £110,000.
The court held that the project manager had been negligent in failing to use reasonable care to procure a formal building contract and as a result the Trust had suffered loss. In reaching its decision, the court made a number of important observations:
- The project manager had a duty of care at common law and under Section 13 of the Supply of Goods and Services Act 1982 to use reasonable care
- Whilst there was no general legal definition of the obligations of a project manager, it would normally be the case that “a project manager will act as a representative of the employer for the purpose of coordinating the different aspects of a construction or engineering project” (also likely to be the court’s view on an IT project)
- It approved comments in earlier cases which established that a project manager’s role depends on the specific facts of each case, although “a central part of the role of the project manager was as coordinator and guardian of the client’s interest”
- If a project manager lacks expertise in some areas, it should seek appropriate specialist advice or alert its client to the need for it to obtain such advice
- Although there was no absolute obligation on the project manager to obtain an executed building contract, the absence of one suggested that something had gone wrong with the project
- The court accepted witness and expert evidence that it was extremely unusual for such a large project to reach completion under a letter of intent only
In this case, the Court decided that the project manager had failed to take the care reasonably required of a competent project manager by: not taking adequate steps to resolve the formal contract, failing to advise its client to ensure that a contract was in place, failing to warn of the dangers of not having a contract and failing to apply sufficient pressure to obtain an executed contract.
Damages awarded against the project manager
In order to assess the losses incurred by the Trust as a result of the project manager’s negligence, the court had to assess what the chances were of the contractor signing the contract, how the Trust would have benefitted from a signed contract and whether the project manager’s liability was successfully capped by the terms of its professional appointment. The court, on the evidence before it, valued the likely settlement under a formal contract at £340,000 and awarded two-thirds of this figure to the Trust to reflect the chance that the Contractor would have signed the agreement, had the project manager not acted negligently. Subject to the cap, this would lead to the Trust receiving damages of just over £225,000.
Could the project manager rely on its limitation of liability cap? No: the court decided that although the limitation clause was properly incorporated into the project manager’s professional appointment, it was unreasonable and invalid under the Unfair Contract Terms Act 1977. Although the court agreed that commercial parties should generally be free to apportion risks as they think fit, it felt that the limitation clause was unreasonable given that:
- One of the other appointment terms required the project manager to take out professional indemnity insurance of £10 million per claim. If the limitation clause was upheld, liability would be capped at just over £110,000, and the vast majority of the stated insurance cover would be “rendered illusory”
- The court was sympathetic to the Trust’s argument that it had assumed that the same terms which applied to two previous projects with the project manager would also apply to this one and so had not studied the terms in detail – the judge felt that the liability cap, which was new and onerous, was unreasonable in that it had been introduced without any specific notice or discussion with the Trust.
The role of project manager: the court accepted that it was hard to define what a project manager should do precisely, although some certainty can be obtained by having a clear list of express obligations/tasks which the project manager is undertaking. Even with such a list, the court stressed that an inherent part of the project manager’s role is to exercise commercial judgment and common sense on behalf of its client – there were suggestions in this case that the project manager had introduced more inexperienced staff during the project, which may have contributed to the failure to obtain an executed Contract. It is therefore important that project management staff are suitably experienced and skilled for their projects. Given the inherent difficulty in defining the scope of a project manager’s role, there may be a greater tendency in future for disappointed clients to make claims against their project manager, as well as the other contracting party.
Using letters of intent: the case has generated a lot of discussion as to whether it really is the case that significant projects are not performed under a letter of intent rather than formal contract – although the latter is clearly preferable, both the construction and IT industries use letters of intent regularly and they do have a useful role to play. It must be remembered that the project manager here was not negligent because it failed to obtain a signed contract, but because it failed to use the proper skill and care in trying to obtain one. In order to ensure that it is not negligent, a project manager must therefore be assertive and proactive in trying to obtain contract signature, advise the client on any risks arising from there not being a contract in place and have a clear timetable of actions so that repeated failure to obtain a signed contract can be escalated between the parties.
Lessons for limitation clauses: in deciding that the discrepancy between the required indemnity levels that the project manager should take out and the actual liability cap made the cap unreasonable and invalid, the court echoed decisions of several years ago. This aspect of the decision has been criticised by some on the basis that the court adopted a simplistic approach in accepting that the Trust would have paid higher fees because of the amount of PI cover formally required, when this is not likely to have been the commercial reality. It is more likely that the second ground for invalidating the limitation clause will be followed in other cases: the fact that the parties had contracted on two earlier projects without a limitation clause was seen as requiring the project manager to take some positive action on this project to draw the clause to the attention of the Trust and its failure to do so was hence unreasonable. Even so, some may be left with the feeling that the Trust was “lucky” and that it only had itself to blame for not checking the clear wording of the limitation clause carefully.