UK: Negligence, Letters of Intent and contract administration

How many times do disputes arise on construction projects because the parties involved have rushed into commencing works on site without sufficiently advancing the design, or considering which form of contract to use, or agreeing contract terms? All too often parties will simply rely on Letters of Intent which (given the number of points outstanding) are vague and give the parties little assistance in determining how to proceed in the event things don’t go according to plan. Nonetheless commercial imperatives are such that parties will often need to get on with the works without all the contractual Is being dotted and Ts crossed.

A recent judgment from the Technology and Construction Court (Cunningham and others v Collett and Farmer [2006] EWHC 1771) has provided some useful guidance as to when it may be appropriate to use Letters of Intent and how Contract Administrators should act in issuing and accepting tenders and recommending the most appropriate standard form of contract for the project in question.

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How many times do disputes arise on construction projects because the parties involved have rushed into commencing works on site without sufficiently advancing the design, or considering which form of contract to use, or agreeing contract terms? All too often parties will simply rely on Letters of Intent which (given the number of points outstanding) are vague and give the parties little assistance in determining how to proceed in the event things don’t go according to plan. Nonetheless commercial imperatives are such that parties will often need to get on with the works without all the contractual Is being dotted and Ts crossed.

A recent judgment from the Technology and Construction Court (Cunningham and others v Collett and Farmer [2006] EWHC 1771) has provided some useful guidance as to when it may be appropriate to use Letters of Intent and how Contract Administrators should act in issuing and accepting tenders and recommending the most appropriate standard form of contract for the project in question.

One of the main lessons from the judgment is that Letters of Intent can be appropriate, but parties should be realistic and careful in their usage. To minimise risk, if you are using a Letter of Intent you should incorporate limits to the amount of work to be done by reference to a maximum monetary value that should not be exceeded by the contractor; and / or minimal work packages of works to be commenced under the Letter.

In the case before the TCC, the claimants had engaged the defendants to act as their Architect/Contract Administrator for the proposed refurbishment of a listed building. After some work had been carried out the defendants ceased work and claimed payment of their outstanding fees. The claimants brought claims against the defendants which included numerous allegations of negligence. The judge decided that the claimants had failed to establish negligence and commented on the key allegations made by the claimants as follows:

Allegation: "The Architect had been negligent in recommending the use of the JCT Minor Works Form".

There was nothing intrinsically wrong with the choice of JCT MW and indeed it had certain advantages over other JCT forms. The fact that the likely contract sum would be significantly higher than £100,000 (the recommended maximum for contracts let on JCT MW) was irrelevant.

The choice of which standard form of building contract should be used for a particular project will usually come down to the consultant’s personal preference and his previous experience. Such a subjective basis for choice is entirely reasonable. If a person likes and understands the way a particular standard form works then, unless there is a very good reason why it should not be used in a particular instance, it would be to everyone’s advantage if that form is recommended for use on projects.

The judge also commented that when a bespoke schedule of amendments is proposed for use with a standard form of contract it is best for it to be issued at the same time as the tender. At the latest they should be issued at the same time as the Letter of Intent. (In this case the schedule was issued later, but was accepted by the contractor without demur, and therefore nothing turned on the delay in issuing it.)

Allegation: "The Architect had been negligent in appointing the Contractor when there were insufficient tenders".

The Judge rejected the allegation that there were insufficient tenders to allow a properly competitive price to be identified for the project. The Architect had acted quite properly, in the circumstances, seeking five tenders and ending up with three.

Allegation: "The Architect had been negligent in appointing the Contractor when the design had been insufficiently developed".

The allegation proceeded from the fact that within the Contractor’s tender there was approximately £260,000 worth of provisional sums (within a tender sum of approximately £605,000). The Judge held that it was impossible to conclude that the mere fact that there was a large element of provisional sums within the Contractor’s tender somehow demonstrated a negligently incomplete design. It was rare for any refurbishment project to go out to tender with every last element of the works designed, particularly on a refurbishment project when the precise condition of the existing property would not be known prior to opening up.

Allegation: "The Architect had been negligent in recommending that a letter of intent should be entered into when such was inappropriate as a matter of principle and inappropriate in the light of the matters that remained to be agreed".

Letters of Intent are sometimes the best way to get works started on site without waiting for a formal contract to be settled. However they often leave parties exposed to uncertainty that the contract may never get signed. The judgment provides useful guidelines for when a letter of intent would be appropriate:

• the workscope and price are agreed (or a clear mechanism is in place to agree them)

• the terms of main contract documents are agreed or very likely to be agreed

• the programme dates are broadly agreed

• there are good reasons to start works in advance of completing main contract documents.

The Judge warned that Letters of Intent should not be used where to do so would be premature, or where the parties are simply hoping difficult contract issues will somehow disappear. He also emphasised that if a Letter of Intent is used then there will inevitably be some risk to both parties, no matter how carefully it is drafted. The purpose of a carefully drafted Letter of Intent is, however, to minimise such risks.

Allegation: "The Architect had been negligent in failing to get the principal contract agreed".

It was found that the main cause of the delay in getting the contract agreed was the Employer’s failure to agree the wording of the escrow agreement. The Architect could not be criticised for agreement of the contract terms or the administration of the letter of intent.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 17/08/2006.