CONSTRUCTION JOURNAL

Fresh case stresses care needed with letters of intent

A new case joins the litany of those arising when work starts on the basis of a letter of intent rather than a contract – and reminds us of the caution necessary when relying on liability caps

Author:

  • Claire King

06 June 2024

Overhead image of Westminster area and house of commons

The recent case of CLS Civil Engineering v WJG Evans [2024] EWHC 194 (TCC) serves to re-emphasise that letters of intent should always be approached with extreme caution and used only as a last resort.

My previous article on letters of intent identified some of the problems they can cause. In CLS, the key issue was whether the cap in the letter of intent was binding.

If it was, could the contractor find a way to recover the costs of around £300,000 that it had incurred above that cap before leaving the site when a construction contract could not be agreed?

Problems arise from working without contract

The facts in this case are not at all unusual: CLS Civil Engineering wished to engage WJG Evans and Sons (WJGE) as the contractor for a development in Pembrokeshire, and it submitted a tender for the works for the total sum of £945,641.33.

However, the parties were then unable to agree the exact terms of the contract, including which JCT form would apply and the amount, if any, of liquidated damages.

As a result of this lack of agreement, it was decided that WJGE should start work on site on the basis of a letter of intent.

Various letters of intent were issued containing caps that steadily increased to a final amount of £1.1m on 18 October 2022.

Despite this, crucial terms including the contract sum, the applicable JCT form and the amount of liquidated damages were not agreed.

As a result in February 2023, in response to WJGE's threat to demobilise, CLS wrote as follows:

'Our maximum liability under the Letter of Intent and its provisions is £1,100,000. It appears to us that there will never be any resolution to the fundamental issues as to the contract sum and liquidated damages. As such we consider that we will be unable to award a contract to WJG Evans and Sons in respect of the above works.

'We note from your email of 2 February 2023 that you are demanding an increase in the letter of intent as you say that you have exceeded the maximum amount and are therefore working at risk […] [P]lease treat this letter as formally removing your licence to remain on site. We require you to demobilise immediately…' [Emphasis added].

WJGE then issued a final application for £1,413,669.24, following which a dispute arose as to whether payment of the full amount was due.

Part 8 proceedings were then started during which it became obvious the real question at issue was whether the cap of £1.1m was binding. 

Related article

Recent cases show risks with letters of intent

Read more

The Judgment

The judge held that the cap was binding, not least because WJGE's witness had admitted as much in his witness statement.

In addition, he said there were at 'at least six occasions on which WJGE expressly or impliedly agreed that WJGE were working subject to the cap'.

Furthermore, in the judge's view there had never been a 'meeting of minds' as to a formal contract and which JCT terms would apply. As such there was no contract in place that would allow the price to be calculated and otherwise displace the cap.

The question then became whether some form of estoppel, a legal defence to enforcing a strict contractual right, could be raised that would prevent the cap from taking effect. The judgment held that there was no such estoppel.

Based on the correspondence, it was clear that no agreement had been reached and the parties were still in negotiation. As such, it could not be said that WJGE was proceeding on the assumption that the terms were agreed.

Finally, the judge found the deduction of retention monies by CLS was a 'neutral point' and did not suggest the JCT terms were agreed, which as highlighted above would have meant the cap in the letter of intent did not apply.

The cap was held to be binding, and no estoppel arose preventing CLS relying on it to prevent further payments. The result was that WJGE was left substantially out of pocket.

Caution must be exercised if there is a cap in a letter of intent

Parties should only ever use a letter of intent if they genuinely have no choice. Letters of intent are not an easy way out of resolving the final negotiation hurdles and should not be used as such.

If the terms of a construction contract cannot be agreed before the works start, commencing those works does not make that job any easier – and may even make it harder, depending on the impact this has on each party's respective bargaining position.

Where there is actually no choice but to act, this particular case indicates that parties must ensure any cap is kept updated regularly.

If you are the contractor, then it is important not to be lulled into a false sense of security and assume that you will be paid for additional work above a cap's value.

Caps are there for a reason and will be binding where the terms of the final construction contract are not agreed – including but not limited to the standard form set of conditions.

If the employer is repeatedly reminding the contractor of the cap, and/or the contractor is regularly using it as a threat to cease work, then continuing to work at risk could leave both parties substantially out of pocket.

As the contractor, either you agree the terms of the contract so you can get paid or, if the terms cannot be agreed, your most sensible decision may be to leave the site.

If you want to continue but can't agree terms then it is essential to ensure that the cap is increased before your work exceeds that value.

Conversely, if you are the employer with the benefit of a letter of intent that has a cap, then it is essential you ensure the cap is clearly flagged in correspondence and relied on against the contractor.

This will assist in preventing an estoppel or waiver arising and providing a defence against the cap being enforced.

If a construction contract can't be agreed, then an employer who has issued a letter of intent will need to weigh up the risks of the contractor leaving the site against the risks that it stays on without ever agreeing terms.

In those circumstances, a cap can be a useful way to bring matters to a head and provide much-needed protection against an uncapped cost liability.

Either way, if you agree to a cap in your letter of intent be prepared to abide by the consequences of it taking effect.

'If the terms of a construction contract cannot be agreed before the works start, commencing those works does not make that job any easier'

Claire King is a partner with Fenwick Elliott LLP


Contact Claire: Email

Related competencies include: Legal/regulatory compliance, Procurement and contracts

Related Articles

BUILT ENVIRONMENT JOURNAL

go to article How certifiers support Scottish building verification

PROPERTY JOURNAL

go to article How to quantify loss of value when art is damaged

CONSTRUCTION JOURNAL

go to article Data centre growth seen in scaled schemes and retrofits