Letters of intent: Friend or foe?
Once again, we see letters of intent causing mischief for their users. This latest mischief was considered by the Court of Appeal in the case of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd .
Let’s rewind 2 years when the case was considered by the Technology and Construction Court (TCC) in October 2016; the judge (Mr Justice Coulson) describing the case as a relatively straightforward 'contract/no contract' case with something of a sting in its tail!
Some 15 years prior, Amec (BCS) Limited (formerly CV Buchan Limited) acted as the specialist concrete sub-contractor on two large projects; the Wellcome Building and Castlepoint Car Park. Amec engaged Arcadis Consulting (UK) Limited (formerly Hyder Consulting (UK) Limited) to carry out certain design works in connection with those projects in anticipation of a wider agreement between the parties that did not later materialise.
It was then alleged that the Castlepoint Car Park was defective and potentially required demolition and rebuilding, with costs running into the many tens of millions. Amec pursued Arcadis for £40million, having settled a claim with the main contractor. Arcadis denied liability for the defects and also argued that there was a contract in respect of their design works which capped their liability to £610,515.
Negotiations of the terms of Arcadis’ appointment had started in November 2001 and continued for over a year, with a key letter dated 6 March 2002 instructing Arcadis to commence its design services. The judge, Mr Justice Coulson, considered whether that letter was a letter of intent, namely an instruction to carry out work up to a certain value on an interim basis, pending the agreement of a formal contract. He concluded that it did indeed have all of the hallmarks of a letter of intent.
Discussions and negotiations of the terms of appointment continued after the 6 March 2002 letter, including discussions around the level of the cap on liability contained within proposed terms and conditions.
Much to Arcadis’ horror, Mr Justice Coulson decided that Arcadis’ liability was uncapped; there was too much uncertainty around the terms of the documents referred to in that letter of 6 March 2002 and too much that was not agreed. The Court was unwilling to ‘rewrite history’ and went on to criticise Arcadis for its “dilatory and often unco-operative approach” in negotiating the appointment documentation.
Fast forward 2 years and the Court of Appeal has chosen to save Arcadis’ bacon, though in turn cooking Amec’s.
The Court of Appeal latched onto the terms of an earlier letter sent by Amec to Arcadis back in November 2001, deciding that it had been the subject of agreement for the purposes of evidencing the terms of the ‘interim contract’. This was because, by commencing the design services, Arcadis had accepted the terms of that November 2001 communication, including the specific version of the terms and conditions referred to in that letter. The Court of Appeal considered that the subsequent negotiations of terms including the level of the cap on liability went to the terms of the ‘final contract’ and did not undermine its inclusion in the ‘interim contract’.
Take away points
- For Employers:
Don’t go past the point of no return. Letters of intent can allow parties to defer reaching agreement of the terms of the contract, creating the very real risk of the parties never concluding negotiations of the ‘final contract’. With every week passing under a letter of intent or a succession of letters of intent, the employer’s negotiating position ebbs away.
- For Contractors/Consultants:
If there are critical terms which you require to apply to the contract, make sure that they are included in the letter of intent.
Ask the question: What happens if we never reach agreement of the final contract terms and what do I therefore need to get expressly and clearly included in this letter of intent as a consequence? …. and do so!
- For Project Managers / Other Advisors:
What is bad for the employer is potentially bad for a project manager or other advisor. Make sure that you, as the project manager / advisor, have given the employer very clear and well documented advice as to the potential pitfalls of letters of intent before you recommend their use.
This was recently seen in the case of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd . There the employer found itself unable to levy liquidated damages against its contractor (Kier) during the contract and blamed its project manager, Turner & Townsend. The employer successfully argued that its project manager had been negligent in failing to advise of the risks associated with letters of intent.
You have been warned!
News & Insights
Buying residential property in England
There are two common forms of ownership of property in England: freehold and leasehold.
Emergency Budget Roundup – what you need to know
Hear ‘what you need to know’ analysis of Chancellor Rishi Sunak’s emergency budget.