Letters of Intent - enter at your own risk!

Is it ever a good idea to commence works under a Letter of Intent (“LOI”) without finalising a formal construction contract?

The case of CLS Civil Engineering Ltd v WJG Evans and Sons [2024] (a partnership) EWHC 194 (TCC) highlights the potential pitfalls of doing so in (i) carrying out works under a LOI rather than agreeing a formal contract prior to commencing works; and (ii) allowing a contractor to continue to undertake works once the developer’s limit of liability under LOI has been exceeded.

Factual Background

In 2021, CLS Civil Engineering Ltd (“CLS”), a developer, engaged WJG Evans and Sons (“WJGE”), a contractor, to carry out construction of a library, retail unit and three apartments. CLS issued WJGE a LOI in August 2021 which detailed (among other things) that:

  • The parties intended to enter into a JCT Intermediate Form of Contract 2016 (“JCT Contract”)
  • Under no circumstances would CLS be liable under the LOI to pay WJGE more than £150,000 plus VAT

The LOI was not signed by WJGE and the works commenced in late August 2021.

While the terms of a JCT Contract were still being negotiated, and in order to allow WJGE to continue with the works, CLS agreed to increase its maximum liability under the LOI on several occasions as follows:

  • In November 2021 increasing the cap to £300,000
  • In March 2022 increasing the cap to £500,000
  • In July 2022 increasing the cap to £800,000
  • In October 2022 increasing the cap to £1,100,000

Ultimately, the terms of a JCT Contract were never agreed, and a dispute then arose between the parties which resulted in CLS declining to award WJGE a full contract for the works. 

Around the same time, WJGE had issued a final valuation of works carried out in the sum of £1,413,669.24. However, CLS contended that its maximum liability to WJGE pursuant to the LOI was capped at £1.1 million. That led WJGE to allege that CLS was in repudiatory breach of contract.

CLS issued Part 8 proceedings and sought declarations that:

  1. There was no JCT Contract between the parties and that any legal relationship between them was governed by the agreed terms set out in the LOI and its revisions
  2. CLS’s maximum liability to WJGE under the LOI was capped at £1.1 million

WJGE argued that:

  1. The matter was not suitable for Part 8 as it involved substantial disputes of fact in three areas: (i) the negotiations pre-LOI; (ii) construing the LOI and any revisions; and (iii) continuing negotiations.
  2. Alternatively, the parties agreement was governed by JCT terms and/or that CLS was estopped by acquiescence.
  3. CLS liability was not capped to £1.1m and CLS was estopped from relying on the cap as it had “paid sums in excess of any liability cap in the LOI”.

What did Neil Moody KC decide?

Neil Moody KC, sitting as deputy judge in the TCC Division of the High Court, presided over the case. 

In deciding whether the case was suitable to proceed under Part 8, he made the following preliminary observations:

  • The value of the dispute between the parties was relatively modest ie £313,669
  • Where Part 8 proceedings are being contemplated claimants should follow the guidance in Cathay Pacific Airlines Ltd v Lufthansa Technik [2019], which supported the principle that by the time of the Part 8 hearing, the parties should have agreed the scope of the dispute and the manner in which any disputed questions of fact should be determined. This was not done in this case.
  • It was common ground between the parties that it was open to the court to consider the disputed matters against a summary judgment test ie whether WJGE had a real prospect of success on its relevant issues

Neil Moody KC held the matter was suitable for Part 8 proceedings because:

  • There were no disputed issues of facts which would make the proceedings unsuitable for Part 8 determination
  • WJGE’s estoppel arguments had no real prospects of success

He further concluded that: 

  • The parties had not reached an agreement as to the JCT terms
  • The parties’ relationship was governed by the LOI (and its revisions)
  • CLS limit of liability was £1.1m pursuant to the revised LOI

Key Takeaways

LOI vs Formal Contract

Construction contracts can be extremely complex and parties often spend a lot of time negotiating and agreeing terms of the contract before works are commenced.

While commencing works on the basis of a LOI can save time and expense, this shortcut carries risks (for both the developer and the contractor) and lacks the certainty that a formal contract can provide. If parties do go down the LOI route, any terms agreed should be unequivocally clear and any key terms not agreed should be clearly detailed so to limit any scope for a dispute that may arise.

If the LOI limits the developer’s liability, this should be monitored carefully by the contractor on a regular basis. With hindsight, WJGE should have stopped work prior to the liability cap being exceeded. Its failure to do so ended up being a costly mistake.

In summary, this case highlights the importance of either (i) agreeing a formal contract before works commence; or (ii) ensuring the terms under the LOI are clear and kept under review. 

Part 8 Procedure

While estoppel will not usually be considered to be appropriate under Part 8 proceedings, this matter also serves an important reminder of the potential benefits of the Part 8 procedure. In considering whether an issue in dispute is suitable to proceed under Part 8, the parties should consider the guidance in Berkeley Homes (South East London) Limited v John Sisk and Son Limited [2023]. 

Part 8 proceedings are not usually suitable where there are substantial disputes of fact, although in this matter the disputed facts could be determined against a summary judgment test ie whether WJGE had a real prospect of success on its relevant issues.

If a claimant considers that the Part 8 procedure is suitable and as highlighted above, the guidance set out in the case of Cathay Pacific Airlines Ltd v Lufthansa Technik [2019] should be followed so that the scope of the dispute, and the manner in which any disputed questions of fact should be determined, is agreed in advance of the Part 8 hearing.

This article forms part of our Breaking Ground series. For more information on the series, contact Andrea Lynch.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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