Consultants warned about failure to advise on dangers of relying on letters of intent

Consultants warned about failure to advise on dangers of relying on letters of intent


Author: Adam Hiscox

The risks to employers of proceeding with construction works whilst relying solely on letters of intent are nothing new.

The case of The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] highlights the risks to construction consultants - and possibly the client's lawyers - of failing to advise their client properly on those risks and the dangers of failing adequately to discharge their duty to procure a signed contract.

The facts

The claimants, the Trustees of Ampleforth College (the Trust) appointed the defendant, Turner & Townsend Project Management Limited (T&T), to act as project managers on projects relating to new boarding accommodation for Ampleforth College. It was important that the works were commenced as early as possible to impress prospective parents.

T&T's services included overseeing the formal award of contracts. T&T put the works out to tender, the initial draft contract providing for liquidated damages (LADs) of £50,000-per-week for any delay in completion of the works.

The building contractor chosen to carry out the works was Kier Northern. The Trust - upon T&T's advice - issued an initial letter of intent. This was despite the presence of material issues which needed to be resolved with the building contract. T&T subsequently issued several letters of intent covering the whole project whilst the issues remained unresolved.
Kier completed the works in November 2004, which was later than had been planned. A dispute then arose between Kier and the Trust. Kier contended that it was entitled to extensions of time and to additional payments in respect of the prolongation costs, whilst the Trust sought liquidated damages of £750,000 for delay.
At mediation the Trust and Kier reached terms whereby Kier agreed not to pursue the additional payments and they would execute the contract. However the Trust would not claim for LADs.

The claim

The Trust sued T&T for damages for professional negligence, alleging that if T&T had acted with the care and skill reasonably expected of a project manager, then it would have procured the signing of the building contract and Kier would have been liable to the Trust for LADs.

This, the Trust argued, would undoubtedly have led to a more favourable outcome for the Trust at mediation. In defence, T&T argued that Kier would not have been obliged to sign any contract and, even if it had done so, the Trust would not have been in a better position.

The decision

The judge ruled that T&T owed the Trust a duty to exercise reasonable care and skill for the purpose of procuring from Kier a signed building contract. This case was distinguished from the judgment in Sweett (UK) Limited v Michael Wight Homes Limited [2012] where it was decided that Sweett's responsibility was only to prepare the documents.

The judge said: "The execution of a contract is to be seen not as a mere aspiration but rather as fundamental.They [letters of intent] do not protect, and are not intended to protect, the employer's interests in the same manner as would the formal contract; that is why their 'classic' use is for restricted purposes."

The judge considered that T&T had treated the contract as a 'dispensable luxury' and that it should have taken steps to resolve the obstacles which prevented its execution, for example by using the Trust's position as employer to exert commercial pressure on Kier.

T&T had also failed to advise the Trust of the limited protection afforded to it by letters of intent as compared with a signed contract. The letters of intent did not, for example, provide the Trust with any right to claim LADs.

Practical tips

Some practical steps to take when faced with similar problems to those encountered by T&T are to:

  • identify early on what matters need to be dealt with and address all outstanding issues with urgency
  • advise on the implications and risks of proceeding without a contract and where necessary highlight the need to seek advice from a legal adviser
  • consider that, although the level of commercial pressure an employer can assert will depend on many factors, it might not always be in an employer's best interests to avoid confrontation altogether. Employers should be prepared to 'call a contractor's bluff' and insist that a contract is entered into if they are faced with the ultimate threat of the contractor walking off site
  • as a last resort, consider sending out the contract anyway and if the contractor still refuses to sign, later assert that it applies.