Letters of intent: Don’t stick to the letter

The risks of using letters of intent have been endlessly highlighted in the courts and addressed in these columns. But the lessons it seems have not been learnt. In yet another case Shaker vs Vistajet Group Holdings SA [2012], the claimant tried to enforce a letter of intent in respect of a potential transaction concerning an aircraft.

The letter contained an obligation to “proceed in good faith and to use reasonable endeavours to agree, execute and deliver” the transaction documents by a cut off date. Predictably, the court found that this did not give rise to an enforceable obligation on the basis that agreements to negotiate or to agree further agreements are unenforceable. So no words in a letter of intent will save parties who have not reached agreement - the courts will not get involved in deciding what is reasonable or unreasonable in an area where the parties may legitimately have differing views or interests.

But in Ampleforth Abbey Trust vs Turner & Townsend Project Management Ltd [2012] Turner & Townsend nevertheless allowed a whole project to proceed under a total of seven letters of intent. The firm were engaged as project managers and quantity surveyors and allowed Kier to start work under a letter of intent because key issues, including the contract sum, had not finally been agreed. Turner & Townsend drafted the letters of intent, all of which stated that neither party intended to be bound by the full contract until it was executed by both parties. The project was late.

Can we hope that, in future, work will not be executed under letters of intent – however close to agreement the parties are?

The draft building contract stated that the Trust was liable to liquidated and ascertained damages (LADs) at the rate of £50,000 per week. The Trust’s legal advice was that it had no entitlement to claim LADs because there was no contract other than the letter of intent. The Trust brought a negligence claim against Turner & Townsend for lost LADs. The court held that Turner & Townsend were liable as they had failed to exercise sufficient focus on the matters holding up execution of the contract or to exert sufficient pressure on Kier to do so. The breach had caused the Trust to suffer loss in respect of liquidated damages.

The judge noted that Turner & Townsend was, as previous decisions of the courts had determined, the “co-ordinator and guardian of the client’s interest”. If it did not have the expertise to advise its client on specialist matters such as insurance it had to seek expert advice or persuade its client to do so. “What it cannot do is simply act as a “post box” and send the evidence of the proposed arrangements to the client without comment”.

But that is what Turner & Townsend did - they did not advise the Trust of the danger of using letters of intent and of not having a full contract. They “treated the contract as a dispensable luxury”. It seems that they were operating under a misapprehension that the Trust was entitled to LADs, notwithstanding that the contract had not been executed. They should have focused on the outstanding matters and made urgent efforts to address them. “To suppose that the alternatives are hostile confrontation or (as happened in this case) supine acquiescence is to lack realism.”

Turner & Townsend attempted to hide behind their limitation on liability at the amount of their fee or £1m - whichever is the less. The court found that was unreasonable since they were required to maintain professional indemnity insurance to a level of £10m. If the limitation was upheld the insurance would be “rendered illusory”. The ramifications of that decision will be significant given the common practice of limiting liability to the fee, or multiples of it, at figures less than the insurance amount

Can we perhaps hope now that lessons will be learnt, not just by project managers but also quantity surveyors, lawyers, architects and all who advise clients on legal issues relating to the formation of building contracts? And that work will not, in future, be executed under letters of intent, however close to agreement the parties are and however desperate the employer is to proceed.

Is there a trend for suing project managers and quantity surveyors in relation to failure to get documents signed? The Turner & Townsend case was immediately preceded by Sweett (UK) Ltd vs Michael Wright Homes Ltd [2012] where the employer sued Sweetts for failing to secure the bond from the contractor before the contractor went into liquidation but did not succeed. Sweett’s obligation was only to “arrange” that the documents were executed not to “ensure” that they were and they had tried hard to get the bond putting pressure on the contractor to sign it and informing the employer of the steps they had taken. The difference between Sweett and Turner & Townsend was obviously action versus “supine acquiescence”.

Ann Minogue is a construction partner at solicitor Ashurst