UK: The Potential Dangers of Extending Letters of Intent

Last Updated: 29 June 2006
Article by Jeremy Glover

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. Another reason was demonstrated by the case of Skanska Rasleigh Weatherfoil v Somerfield Stores Limited where problems emerged as a consequence of work commencing without a clear contract being entered into and the parties subsequently failing to agree and sign up to a contract.

Here Somerfield sought tenders to carry out maintenance works at their stores. Skanska were one of the successful tenderers and on 17 August 2000, Somerfield sent Skanska a letter confirming they had been appointed to provide the maintenance services in three regions. The letter was stated to be subject to contract and enclosed a draft facilities management agreement. The letter further stated:

"Whilst we are negotiating the terms of the Agreement, you will provide the Services under the terms of the Contract from 28 August 2000 ... until 27 October 2000".

On 21 November 2000, Somerfield extended this period until 26 November 2000. On 22 December 2000, Somerfield wrote another letter to Skanska, again said to be subject to contract, which further extended the working period. This time until 21 January 2000. The letter said that Somerfield were not prepared to give any further extension to this letter. That deadline passed. Skanska continued to perform the maintenance services.

By the end of 2002, a dispute had arisen over whether Skanska were entitled to be paid for a number of jobs which were stated to be "timed out" because an invoice had not been submitted within the period required by the draft facilities management agreement.

Before Mr Justice Ramsey, Somerfield argued that all of the terms the facilities management agreement were incorporated including the "timed out" provisions. Skanska said that the terms of the agreement were incorporated only to the extent that they defined the services which Skanska was required to provide. Skanska also argued that the agreement expired on 21 January 2001. Therefore, there was no agreement as to the contractual relationship and in particular any time limit on the submission of invoices.

The Judge said that that letter of 17 August 2000 was intended to give rise only to an interim arrangement pending the negotiation of an acceptable facilities management agreement. The use of the phrase subject to contract, for example, demonstrated that the parties were not to be bound by the full terms of such an agreement until all necessary matters had been finally negotiated. However, Somerfield’s immediate requirement for maintenance works could not await the outcome of the negotiations.

The Judge further held that the obligation to provide the services "under the terms of the contract" could not be read as including all the terms of the facilities management agreement. However, equally it could not be read as including none of those terms. The intention of the parties could not have been to incorporate the terms of the draft agreement attached to the letter, because these were the terms which the parties were negotiating and which were therefore not necessarily acceptable.

Therefore, the Judge said that the parties intended to incorporate the terms of the facilities management agreement only to the extent that they were necessary to define the services which Skanska was to provide.

In answer to the question as to whether or not any binding agreement continued beyond 21 January 2001, the Judge looked at what happened in the period from 17 August 2000. This was the period during which the interim arrangements were to apply pending the negotiation of the mutually acceptable contract. Somerfield said that the parties operationally carried on as before after 21 January 2001. Skanska said that they carried out work after that time only in response to Somerfield faxed requests.

The Judge considered that whilst the wording of correspondence in this period made it clear that Somerfield were reluctant to extend the interim period, it did not contemplate that the terms of the contract (as expressed in the 17 August 2000 letter) would not continue beyond 21 January 2001. Phrases used were by way of exhortation to meet a deadline for the performance of certain obligations (i.e. negotiate the contract) they were not unless or definitive deadlines, which could not be extended.

The question for the Court was whether the parties continued to operate on the basis of the original contract after 21 January 2001. Perhaps the most important fact as far as the Judge was concerned was that the parties continued to conduct themselves as they had before with the pre-existing agreement. Nothing really happened contractually after 21 January 2001. Therefore, the original August 2000 contract continued.

This meant that no binding agreement had been reached about the alleged timing out at any period. No supplementary agreements were made. The purpose of the meetings that took place in relation to them was to negotiate the finalisation the facilities management agreement. These meetings were at all times carried out subject to contract type basis. That one of the parties had taken legal advice and made incorrect assertions as to what contract position applied did not matter.

The fact that the parties continued to conduct themselves as before in circumstances where they had pre-existing contractual arrangement was the most important factor which influenced the court. Skanska continued to provide services in the same way as they envisaged under the August 2000 letter. Thus that the contract continued on that basis well into 2003 when Skanska ceased performing the Services. It may not have been what the parties intended. However that was the consequence of the parties’ failure to regularise their contractual relationship.

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.

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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