Letters of intent are commonly used in the construction industry to allow building works to commence prior to the finalisation and execution of the formal contract. Two recent cases heard in the Technology and Construction Court serve as timely reminders of the risks involved, both to the employer and to the contractor, in proceeding with works in the absence of an executed building contract.

Background

Mechanical and electrical works were commenced by Haden Young Limited on the basis of a letter of intent. The works were completed without the parties concluding the sub-contract. Haden Young Limited argued that a contract did not exist as the parties were still in dispute as to certain essential terms of the contract and that it was accordingly entitled to payment on a quantum meruit basis for the work carried out.

Decision

The Technology and Construction Court held in favour of Haden Young. The parties had not reached agreement on several key terms of the sub-contract such as the level of professional indemnity insurance required, the number of permitted assignments of the sub-contractor’s collateral warranty, and whether payment should be linked to the provision of the collateral warranty. The Court held that no sub-contract had been concluded and as a result Haden Young was entitled to reasonable remuneration assessed on a quantum meruit basis for the mechanical and electrical works carried out.

Diamond Build Limited v Clapham Park Homes Limited [2008] EWHC 1439 (TCC)
 
Background

Building works commenced on the basis of a letter of intent which provided that the parties would enter into a JCT Intermediate Form of Building Contract 2005 by deed. The letter of intent contained a cap of £250,000 on the employer’s liability in relation to works carried out by the contractor that were the subject matter of the tender. The letter of intent also provided that the undertakings in the letter would be extinguished on the execution of the building contract.

The terms of the building contract were agreed and the contract documents were sent to the contractor for execution. However, by the time the contractor executed and returned the contract documents, relationships between the parties had deteriorated and the employer refused to pay the contractor in excess of letter of intent’s financial cap.

The contractor argued that either (i) no contract existed between the parties or (ii) as a result of the issue of the contract documents for execution, a JCT Intermediate Form of Building Contract 2005 existed between the parties and the financial cap provided in the letter of intent was accordingly extinguished.

Decision

The Technology and Construction Court held that a valid contract existed between the parties on the basis of the letter of intent. As the building contract had not been executed as a deed, the letter of intent had not been superseded and the financial cap was applicable and enforceable.

Comment

Letters of intent are commonplace in the construction industry and it is inevitable that they will continue to be used. However, the Haden Young and Diamond Build decisions highlight the dangers associated with such letters of intent where works carry on in the absence of a concluded building contract. Where key terms of the building contract have yet to be agreed, employers must ensure that their liability is sufficiently limited under the terms of the letter of intent. The Haden Young case makes clear that employers may face paying the contractor on a quantum meruit basis where costs are incurred in absence of agreed terms or a financial cap.

On the other hand, the Diamond Build decision acts as a reminder to contractors and employers to consider carefully the provisions of letters of intent with which they have been presented. Where a letter of intent contains a financial cap and works proceed in the absence of an executed building contract, contractors should be careful and may wish to ensure that similar financial caps are agreed with any sub-contractors engaged or that the financial caps are extended as and when necessary.

For further information please contact Jonathan Hyndman or the Partner with whom you usually deal