The decision in Diamond Build Limited v Clapham Park Homes
Limited  EWHC 1439 (TCC) demonstrates the potential risk
for a contractor who commences work under a letter of intent prior
to finalising the building contract. It is common practice in the
building industry to begin projects on the basis of a letter of
intent whilst the terms of the building contract are being
finalised. In many cases, no formal contract is ever signed. This
case illustrates the problems that can arise when acting solely
under a letter of intent.
Clapham Park Homes Limited (Clapham Park)
invited Diamond Build Limited (Diamond) to tender
for the refurbishment and regeneration works on a number of houses
and flats in Clapham Park Estate.
A letter of intent was sent to Diamond in June 2007 recording
the following agreement:
that Diamond was to proceed with the works
that an undertaking was made to pay Diamond's reasonable
costs up to an amount of £250,000 should no formal contract
be executed (Cap)
that the letter of intent would be wholly extinguished at the
execution of a formal contract
the formal contract was required to be signed as a deed,
by executing the letter of intent, the parties agreed to be
bound by the terms and conditions relating to rights and
obligations until the formal contract was signed.
General contractual terms such as completion dates and
commencement dates were also included in the letter of intent. The
letter of intent was executed by both parties.
Diamond commenced work under the letter of intent and placed
orders with suppliers and subcontractors in excess of approximately
£1.5m. During this time, Clapham Park had issued
approximately 5 interim certificates and instructed variations.
Diamond had also made monthly applications and claims for extension
A formal contract was sent to Diamond in October 2007 but the
contract was never executed.
The relationship between the parties began to deteriorate in
November 2007 due mainly to delays and poor workmanship from
Diamond. Clapham Park terminated the relationship in accordance
with the terms of the letter of intent. Diamond refuted that
Clapham Park could terminate under the letter of intent, as it
alleged that a formal contract had come into existence. Diamond
the letter of intent did not create a binding contract
at the time of termination, the letter of intent had been
replaced by a formal contract due to the action and relationship of
the parties (including the issuing of the draft proposed contract),
the Cap on Clapham Park's liability was unreasonable.
Justice Akenhead decided that the letter of intent did indeed
create a simple contract as there was sufficient certainty to
ascertain details such as commencement/completion dates, contract
sum, undertakings and requirement to proceed. It was also relevant
that the letter of intent was signed by both parties.
Justice Akenhead found that a formal contract had not been
entered into as the requirements in the letter of intent for a
formal contract to come into existence had not been complied with.
In particular, an executed contract in the form of a deed had not
been completed. His Honour stated that, by accepting the terms of
the letter of intent, both parties agreed to be governed by the
rights and responsibilities of the letter of intent until such time
a formal contract was executed.
Lastly, his Honour decided that the Cap was not unreasonable or
unfair as it was open to Diamond to approach Clapham Park for an
increase in the Cap should it be needed. However, it was noted that
this Cap related solely to the tendered work and any work that fell
outside this scope was not covered by the Cap. Therefore, on the
occasions that Clapham Park issued variations to the tendered work,
this work would attract payment in addition to the Cap.
This case illustrates the need to ensure that letters of intent
are used sparingly and wisely and to ensure that a formal contract
is signed as soon as possible, otherwise the letter of intent can
create contractual relations. In addition, where a cap is in place
under a letter of intent, it is important to ensure that it is not
exceeded unless properly replaced by a formal contract or varied in
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.
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