Are letters of intent necessarily a “bad thing”?

Letters of intent on construction projects are often condemned as a Bad Thing and to be avoided at all costs. They are particularly prevalent in the construction industry and can create all sorts of problems for both the contractor and the employer. However, this is not to say that using a letter of intent is always flawed.

There are often good commercial reasons why a letter of intent is issued before the full contract is executed. It may be because long lead items need to be ordered, enabling works need to be carried out at an early stage or elements of design need to be progressed. In each of these instances, entering into a letter of intent is not only appropriate but is a commercially sensible approach.

On the flip side, there are many occasions when letters of intent are clearly not appropriate. If the parties are struggling to agree key terms of their contract, issuing a letter of intent is unlikely to aid the process. In fact, the longer works continue under a letter (or letters) of intent, the less likely it is that the parties will reach agreement on the outstanding issues, because one or both of them will lose the incentive (or the will) to do so.

The Ampleforth case

Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd was, in many ways, a classic “letter of intent” case. Timing was all important – school accommodation blocks were required to be available for the start of term – so the contractor was instructed to start the works as soon as possible under a letter of intent. However, in this case the employer succeeded in holding its project manager to account for failing to procure that the contractor entered into a building contract, in effect allowing the contractor to complete the project on the basis of a series of letters of intent. This ultimately deprived the employer of the opportunity to levy liquidated damages (LDs) for delayed completion, since the letter of intent did not contain LD provisions whereas the form of JCT contract upon which the parties “intended” to contract did.

What did the project manager do wrong?

As far as I’m aware, this case is the first of its kind. However, there is no suggestion that entering into a letter of intent at the outset was wrong: it simply reflected the commercial drivers of the project. Nor is it suggested that the absence of an executed building contract was, of itself, evidence of negligence on the project manager’s part. This is in line with the recent analogous decision in Sweett (UK) Ltd v Michael Wight Homes Ltd. So what went wrong? Why did the court conclude that the project manager had breached its duty to exercise reasonable skill and care in failing to procure an executed building contract?

The critical issue, it seems to me, was that the project manager fundamentally misunderstood the true nature and effect of the particular letters of intent used in this case and as a result did not properly advise its client as to their advantages and disadvantages. The project manager believed that, to the extent works were done under the letters of intent, they were subject to the provisions of the (as yet unexecuted) contract. In fact the letters, which had been drafted by the project manager, stated the exact opposite. In essence, they were offers to contract on strictly limited terms and on a short-term basis, coupled with an expression of intention to enter into a full and formal building contract in due course, the terms of which would not bind the parties until it was executed.

As a result of this misunderstanding, the project manager failed to advise the employer of the risks of progressing (and ultimately completing) the project on the basis of these letters of intent. They provided very limited remedies for the employer; in particular, there was no provision for LDs if completion was delayed. This misunderstanding also appeared to be the main driver behind the other shortcomings identified by the court, namely that the project manager failed to focus sufficiently on the matters holding up execution of the contract (which the court considered were not uncommon in the context of a design and build procurement with external funding) or to exert sufficient pressure on the contractor to finalise it. On the contrary, the project manager took the decision to “issue a letter of intent for the whole value up to the end of the job” in order to avoid having to deal with a dispute over additional fees claimed by the structural engineer.

On the basis of the evidence before it, the court concluded that the project manager had failed in its role as “co-ordinator and guardian of the client’s interests”. It had failed to appreciate that finalising the contractual arrangements was of central importance and had approached the matter as though execution of the contract was aspirational, rather than fundamental.

What is the moral of this story?

In my view, the moral of this story is not that letters of intent should always be avoided because they are a Bad Thing, but that – to coin the phrase of HHJ Coulson (as he then was) in Cunningham and others v Collett and Farmer – they should not be used “unthinkingly”. That case provides some guidance as to what “unthinkingly” may mean in this context. Anyone advising on a letter of intent must understand the nature of the ”letter” in question, the rationale for using that type of letter, its effect and limitations (including risk allocation) and advise the client accordingly. The adviser must make every effort to ensure that a full and formal contract is finalised and executed without delay (if appropriate for that project) but must advise the client of the risk that this may not happen – despite everyone’s best efforts – and of the consequences in that event.

However, this is no different from the role of any professional advising in relation to a specific document on any transaction. Letters of intent are not unique in this sense. It is the unthinking use of letters of intent that have given them their bad name, not the nature of the beast itself.

This is the first of two blog posts on issues raised by the Ampleforth case. Our next post will consider caps on liability in professional appointments: another old chestnut.

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