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A costly reminder of the pitfalls associated with letters of intent

11 April 2024

How costly can it be to proceed with a project based on a letter of intent? Our team explores the pitfalls and some practical tips to side step a potential dispute.  

We are often contacted by clients that have proceeded (and are quite far along) with a project based on a letter of intent ("LOI"), rather than a fully negotiated building contract. In many instances, there is uncertainty as to what the parties to the contract expect from one another and we are required to provide some practical tips to side step a potential dispute.

The recent case of CLS Civil Engineering Limited ("CLS") v WJG Evans and Sons ("WJGE"), which related to the construction of a library, retail provision and three apartments in Pembrokeshire, is an example of such as a scenario.

It serves as a timely reminder of the pitfalls associated with proceeding with works or services based only on a LOI. 

CLS argued that the relationship was governed by a LOI dated 14 August 2021 (the "August LOI") and its subsequent revisions, which helpfully limited CLS's liability to £1.1 million (the "Liability Cap"). WJGE's disagreed, arguing that the terms of the JCT applied and that CLS should be prevented (or "estopped") from denying that (1) an email from CLS amounted to an agreement of the contract conditions being proposed by WJGE and (2) from relying on the Liability Cap. WJGE adopted this position in the context of it having lodged a final valuation for £1,413,669.24.  

Ultimately, the court held that the parties' relationship was not governed by the JCT terms and that CLS's liability was capped at £1,100,100 (+VAT). Whilst a tedious recital of the correspondence exchanged between the parties (peppered with some latin phrases) is always appealing to a lawyer, perhaps it is better to mine the details of this case to provide both employers and contractors with some of the key points and practical tips to keep in mind – at least then it might be a fair fight if a dispute does arise!

The first practical tip in relation to LOIs is a simple one – where possible, do not use them. The temptation to proceed on the basis of a 1 page document and a handshake is understandable in the modern construction industry, but is done at significant risk. If however it is decided that a LOI is to be used, both parties should seek appropriate advice ahead of execution to ensure they fully understand the rights and obligations that are being undertaken. A contractor entering into a LOI might follow in the steps of WJGE and expressly state the basis of the understanding on which they are proceeding.

Although WJGE perhaps made some other errors (including its delay in deciding to cease work, pending a resolution of the form of JCT to be entered into), at the very least the basis on which they were operating was clear. Hindsight is of course 20-20, and WJGE are not the first (nor will it be the last) to be adversely impacted by the vagaries associated with LOIs. The Employer's Agent rather unhelpfully, but perhaps wisely, did not expressly state whether they were relying on the JCT terms.  WJGE also quite sensibly invited CLS to notify any objections to its understanding, which could help clear up any uncertainty.  

Second, clarify the core terms of the main contract to be entered into at tender stage. Unfortunately, for WLGE, the only thing that was seemingly certain was that the various liability caps were agreed to be applicable for CLS's benefit. This was picked up by the judge, Neil Moody KC, "not only did Mr Evans admit the existence of the cap in his witness statement, the correspondence between the parties, objectively construed, shows that the cap was accepted at the time as the works progressed". Of course, it could be that WJGE's 'acceptance' of this cap was based on a more nuanced position which was not borne out in the evidence. This gives rise to another recommendation, to bear in mind that the intention of each party will be determined not only on their express actions, but implied based on what an "objective" observer might reasonably consider to have been the position.  

The sequencing of steps taken throughout the life cycle of a construction project is vital, particularly at tender stage when the parties are yet to execute contracts. It is not uncommon for parties amidst a series of offers and counter offers to proceed to perform an agreement, without specifically notifying its objections and inadvertendtly be deemed to have agreed the final terms exchanged by its conduct.  As noted by Neil Moody KC in this case, "WJGE accepted that offer by starting work". This type of exchange is aptly referred to as a "Battle of the Forms", the 'winner' of which can be "the man who fires the last shot". Parties that are (or are soon to be) signatories to a LOI and/or building contract should keep this in mind at all times, and treat each step taken as being akin to a chess match.

Parties to a LOI should also avoid burying their head in the sand and/or pressing on as if all parties understand one anothers intentions and are in agreement. In CLS, WJGE made an application for an extension of time with express reliance on the JCT intermediate, which Neil Moody KC noted "was plainly not agreed". WJGE also took until 04 July 2022 (ironically!) to try and gain independence by threatening to cease works. In the context of LOIs, ignorance is certainly not bliss and parties should always adopt a default position that certainty of terms is key to avoiding disputes, and there is no limit to the lengths one should go to to make their intentions clear. With this in mind, correspondence and documents should make use of plain language.

Further practical steps to guard against uncertainty might include scheduling regular meetings during the course of the LOI works, taking clear minutes and circulating the same (as appropriate) between the parties.

Our Construction team understands the issues our clients are facing. Please contact us if we can assist you.

Authors: Stephen McGuigan, Yolanda Walker and David McNeice 

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