The decision in Diamond Build Limited v Clapham Park Homes Limited [2008] 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.

Background

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, and
  • 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 of time.

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 argued that:

  • 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  • at the time of termination, the letter of intent had been replaced by a formal contract due to the action and relationship of the parties (including the issuing of the draft proposed contract), and
  • the Cap on Clapham Park's liability was unreasonable.

Judgment

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.

Implications

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 writing.

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