Intent on Disaster

The perils of relying on a letter of intent

In CLS Civil Engineering Ltd. v WJG Evans and Sons [2024], the court found that in the absence of a formally agreed building contract, a liability cap contained in an unsigned letter of intent was binding. As a result, the claimant contractor was not entitled to additional payment exceeding the cap.

Background

CLS Civil Engineering Ltd. (the “Developer”) engaged WJG Evans and Sons (the “Contractor”) to construct a library, retail provision and three apartments at a development in Pembrokeshire (the “Works”).

The Works commenced under an unsigned letter of intent (the “LOI”) while the parties sought to agree to terms of a Joint Contracts Tribunal (JCT) Intermediate Building Contract. The LOI contained provisions capping the Developer’s liability to pay the Contractor at £150,000. This financial cap was revised several times, ultimately to £1.1 million, but the JCT contract was never signed.

With the parties ultimately unable to agree on the terms of the JCT Contract, the Developer eventually instructed the Contractor to leave the site, and the Contractor issued a final valuation for works carried out in the sum of £1,413,669.24 (circa £300,000 in excess of the financial cap in the LOI).

In response to this, the Developer commenced legal proceedings against the Contractor seeking declarations that:

1. There was no formal construction contract between the parties, and their relationship was governed solely by the unsigned LOI (as amended); and
2. The Developer’s maximum liability to pay the Contractor under the LOI (as amended) was therefore limited to £1.1 million. 

The Court’s Decision

The court found that the financial cap contained in the unsigned LOI was binding on the parties, and the Contractor was not entitled to the additional payment of circa £300,000 they had sought. 

The court determined that the Contractor was bound by the financial cap because:

• The Contractor conceded in a witness statement as part of the legal proceedings that the cap had been agreed.
• The Contractor had accepted the cap in the LOI by commencing the Works 10 days after the LOI was sent. The existence of the cap was also affirmed by the Contractor when it asked the Developer to increase the cap on several previous occasions.
• It was clear from the parties’ correspondence that the JCT contract was still being negotiated and the parties “never achieved a meeting of minds” in that regard. It could not be said that the JCT contract was ever entered into so as to supersede the letter of intent.  

Analysis

This case illustrates the importance of taking the time to properly negotiate and allocate risk under a formal contract prior to commencing works. 

To the extent parties wish to rely on a letter of intent prior to entering a formal contract, considerable caution must be exercised. From a contractor’s perspective, any stated caps on liability to make payment should be watched closely to ensure they are not exceeded. In this case, at the point at which the £1.1-million cap was about to be exceeded, the Contractor ought to have ceased work pending negotiation of a further revision to the cap or the conclusion of a formal contract.

From a developer’s perspective, this case emphasises that financial caps in letters of intent are binding and will be enforced by the courts. Anyone placing a letter of intent would be well advised to consider including a financial limit on the amount they are prepared to pay to the contractor prior to entering into a more formal contract. This can provide the developer with effective protection against the risk of the whole project being carried out under a letter of intent.

This article contains information of general interest about current legal issues but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers. © Hawkswell Kilvington Ltd. 2024