Beware the Letter of Intent!

A recent judgment handed down by the TCC confirms what might be known to many – proceed on a Letter of Intent at your peril!

The facts

In CLS Civil Engineering Ltd v WJG Evans and Sons [2024] EWHC 194 (TCC) the parties were proceeding with the development of a library, retail unit and three apartments. Works commenced under a Letter of Intent (“the LoI”), whilst the parties tried to agree the terms of the wider contract.

It was common ground that the intent was that the contract would be based on the JCT Intermediate Building Contract, but the parties could not agree key terms – including the proposed schedule of amendments to the standard form, or whether liquidated damages would apply.

Pending agreement of the JCT terms, the LoI stated:

“Under no circumstances will be will we [sic] be liable under this Letter of Intent to pay you more than £150,000”.

As the project progressed, the parties could not agree the terms of the JCT Contract. To keep the project moving, the employer agreed to extend the cap in the LoI, first to £300,000, then to £500,000, then to £800,000 and finally to £1,100,000.

Eventually, CLS terminated the contract. WJGE asserted that CLS was in repudiatory breach of contract and sought £1,413,669.24 by way of its termination account.

The proceedings

CLS brought a claim under Part 8 of the Civil Procedure Rules. Part 8 claims are generally restricted to claims where there is no material dispute about the facts of what happened, and where evidence from witnesses would not be required. In a construction setting, Part 8 is often used for matters arising out of adjudication. Indeed, this claim was mistakenly marked as such a claim.

The claim sought two declarations from the Court:

“a. That there is no construction contract between the parties and that any legal relationship between the parties is solely governed by the agreed terms set out in the LoI dated 14th August 2021 and its revisions thereafter;

b. That the Claimant’s maximum liability under the LoI and its revisions is £1,100,000.”

WJGE argued that the case was unsuitable for Part 8 proceedings and should be pursued via the (much slower and costlier) Part 7 basis. In the alternative, WJGE submitted that the terms of the cap did not apply and that the applicable contract governing their works should in fact be that of the JCT Intermediate Contract. WJGE also sought to argue that CLS was estopped from relying on the cap. Generally, estoppel claims are complicated and unsuitable for Part 8.

The judge determined that the matter was suitable for Part 8 proceedings on the basis that:

1.     the facts relating to the matters before the Court were not disputed in any material way; and

2.     the estoppel arguments were so weak that they had no real prospect of success.

The judge then went on to decide that the terms of the LoI were binding and that the cap of £1.1m did therefore apply. He found that the JCT terms had never been agreed.

The Birketts view

This case is a useful reminder that commencing a project pursuant to a LoI is fraught with danger for both parties. This is why we typically advise parties against entering into LoIs in the first place where at all possible. It is often far better for parties to take the time to properly conclude any negotiations on contract terms before commencing works, not least because once works do commence; formalising contractual arrangements is often superseded in favour of simply getting on with the job.

This dispute appears, at its core, to have arisen because the terms of the proposed contract were not clear at tender stage. The moral of the story: include the contract, or at least the key terms and amendments, in the invitation to tender documents as this represents both the scope of works and the contractual risk in a project which the contractor is required to price.

Where the parties’ only option is to proceed under a letter of intent, the decision provides a reminder of the importance of:

1. the terms applicable to the Letter of Intent are clear, with any outstanding terms to be agreed clearly identified; and
2. where limits of liability do apply – either to a contractor limiting their scope of work, or to an employer in terms of financial caps on liability – they should be monitored regularly to ensure they are not exceeded. Any work which a contractor does either beyond the scope of the LoI, or are valued more than the financial cap, it will be entirely at the contractor’s own risk.

WJGE should have acted in accordance with the advice given; and stopped work with immediate effect when the limit of liability was reached.

Whilst the employer may feel relieved that the cap was effective, the uncertainty and disruption to the project caused by the inability to agree terms will certainly have caused additional cost and delay, not least due to the additional time and cost consequences incurred in dealing with the legal proceedings.

In contrast for the contractor, the apparent security initially provided by the LoI was quickly superseded when progress on site caused them to be over £300k out of pocket following termination of the LoI by the employer.

Finally, the case is also a reminder of the usefulness of Part 8 proceedings. Where interpretation of a contract has as profound an impact as here, Part 8 proceedings can get to an answer, but are often cheaper and quicker. It needs to be used carefully, and in a targeted way, but it is a valuable weapon in the dispute resolution armoury.