In his article, Letters of Intent: Principles and Pitfalls,* my colleague Matthew Needham-Laing concluded that in an ideal world, there would be no letters of intent. One of the reasons for this was demonstrated by the recent case of ERDC Group Limited v Brunel University where a dispute arose as to the basis upon which the contractor should be paid for works carried out under a letter of intent.
ERDC submitted a tender for works to provide sporting facilities which were to be carried out on the basis of the JCT Standard WCD Contract, 1998 Edition. Brunel decided to appoint ERDC, although the formal execution of the contract documents was deferred until after the grant of full planning permission. ERDC agreed to progress the works under a letter of intent. Four further letters of intent were issued and the authority under the final letter of intent expired on 1 September 2002. ERDC continued with the works after that date. The majority of the works were completed by November 2002 but the contract was not executed. ERDC said that the work content of the project had changed significantly and that accordingly they were not prepared to sign the contract documents. ERDC also said that they were entitled to be paid upon a quantum meruit basis. Brunel said that the work executed both prior to and post 1 September 2002 was to be valued according to the JCT contract as provided for by the letters of intent.
The key provisions of the letter of intent were as follows:
"We write to inform you that your adjusted tender for the above works in the sum of £1,238,635.00 has been recommended for acceptance. However, the University are not in a position to award a contract until certain planning conditions are discharged.
In the meantime in order to enable you to deliver the works in line with the Construction Programme of 8 weeks design/mobilisation period and 18 weeks construction, the University is prepared to issue this letter of appointment pending the execution of the Formal Contract subject to the following terms and conditions:
- You are hereby authorised to carry out design, planning and procurement works as necessary to make a full and proper start to the works once full planning permission has been received subject to satisfactory insurances and liaison with the University Authorities which shall comprise some or all of the following but not restricted to the following…
- Until formal execution of the Contract your appointment will be governed by the terms of this letter … However upon the execution of the Contract performance by you of the works authorised by this letter shall be deemed to have been carried out under the Contract and according to its terms and conditions…
Work shall be paid for in accordance with the normal valuation and certification rules of the JCT Standard Form of Building Contract With Contractors Design to a maximum of £15,000.00 until the issue of a further letter of intent and agreed revised sum or signing of the contracts.
However such payment will not include any entitlement for loss or profit on any works not carried out.
No expense shall be incurred in excess of the above sum or agreed revised sum until such time as the formal Contract Documents have been signed…
- Subject to your acceptance of the foregoing terms and conditions, Brunel University hereby confirms that it will pay you up to the sum of fifteen thousand pounds (£15,000.00) in respect of the provision of the works required under the terms of this letter…
- … This letter constitutes an instruction to you to commence work by only as necessary for you to ensure that the agreed construction programme is met…
Please confirm by return that the above terms are acceptable to you by countersigning and returning one copy of this letter."
HHJ LLoyd QC held that from the wording of the letters of intent, there had been a clear intention to create legal relations. The letters were contracts of the classic "conditional" variety. Although Brunel was not prepared to contract unconditionally for the whole of the works, it decided to offer ERDC a limited contract on the understanding that when it was able to conclude the full contract that was contemplated, that contract would take effect retroactively. Therefore the letters created a contract, one term of which was that the work carried out before 1 September 2002 was to be valued in accordance with the JCT contract, in other words not on a quantum meruit basis but by applying the tender rates and prices.
That left the question of how the work carried out after the letters of intent expired was to be valued. Both parties agreed this should be on a quantum meruit basis. However, as the Judge noted, the courts have not laid down any hard and fast rules limiting the way in which a reasonable sum is to be assessed. The contractor should be paid at a fair commercial rate for the work done. However what was that rate? ERDC said the works should be valued on a costs plus profit basis, whereas Brunel said they should be valued in the same way as the works carried out under the letters of intent.
Brunel relied on the judgment of Mr Records Reece QC in Sanjay Lachani v Destination Canada (UK) Ltd (1997) 13 Const LJ:
"A building contractor should not be better off as a result of the failure to conclude a contract than he would have been if his offer had been accepted, i.e., in practical terms, in a case such as this, the price which the building contractor thought he was to get for the works (because he thought his offer had been accepted) must be the upper limit of the remuneration to which he could reasonably claim to be entitled, even if at that level of pricing the building contractor would inevitably have ended up showing an overall loss."
In other words, whilst the contractor was entitled to a fair commercial rate or price for the work done, in determining the reasonableness of the valuation here, the court should take into account tender costs and even abortive pre-contract negotiations as to price. Thus the assessment should be made on ERDC’s tender rates and prices since they had been used by the parties throughout the works and they were reasonable commercial rates. Indeed ERDC had continued to work for a considerable time after 1 September 2002 as if the previous arrangements were still in existence.
Ultimately, the Judge came to the conclusion that, on the facts of this case it would be not right to switch from an assessment based on ERDC’s rates to one based entirely on ERDC’s costs. ERDC did not make its position clear straightaway only doing so when all the main elements of work were substantially complete. ERDC applied for payment (and was paid until December 2002) on the basis of the principles set out in the first letter of intent, i.e. in accordance with the JCT Valuation Rules. One of the quantity surveyor witnesses noted in evidence that:
"a price or rate that was reasonable before 1 September, in my opinion, did not become unreasonable after 1 September simply because the authority in the letter of appointment expires."
It was shown that the conditions under which the remaining work was carried out did not differ materially from those that had been originally contemplated. It was also demonstrated that ERDC’s tender was not abnormally low. Accordingly, as the conditions under which the latter work had been carried out did not differ materially from the conditions under which the rest of the work had been carried out, the appropriate way to value this work was by reference to the original ERDC contract rates and not on a cost plus profits basis.
This article is based on an article from the latest issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.
* To view "Letters of Intent: Principles and Pitfalls", please click on ‘Next Page’ link below.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.