In construction projects parties often require time to agree to terms of a finalised building contract. A standard building contract, especially the JCT version, can be lengthy and substantial, requiring attention and negotiation before the parties can agree terms. At the same time, employers must juggle their requirement to ensure terms provide sufficient protection against commencing works on site.

It is therefore common practice for an employer and contractor to enter into a Letter of Intent (LOI). A LOI is a document enabling one party to request from the other to undertake a limited scope of work with an intention that a building contract will be entered into at a later date.

That enables works to commence as soon as possible and provides some assurances to employers and their contractors that a contract will be entered into after the final terms are agreed following rounds of negotiations. LOIs mitigate delay by enabling works to commence prior to a signed building contract.

LOIs can however become problematic, especially if negotiations for a building contract take longer than expected or terms of contract are never agreed. Parties are left in a precarious position wondering where they stand. This can be for all sorts of reasons including negotiations failing to break a deadlock and circumstances on site.

These issues were addressed in the recent case of Anchor 2020 Limited v Midas Construction Limited [2019] EWHC 435, which was heard earlier this year before Mr Justice Waksman in the High Court’s Technology and Construction Court (TCC).

Anchor v Midas

In 2013, Anchor, being the Employer, appointed Midas as a contractor for the design and construction of a new Continuing Retirement Community in Yateley, Hampshire. The parties were unable to agree to terms of a building contract before the start date, so a series of LOIs were executed throughout the works, with the intention that an amended JCT Design and Build Contract, 2011 Edition would be entered into eventually. The first LOI was agreed on 10 September 2013 and the last LOI expired on 30 June 2014.

On 21 July 2014, Midas signed a copy of a building contract but Anchor never signed it upon noticing that certain documents were different to what Anchor envisaged. One document appended to the contract was a risk register. The register quantified certain cost risks for Anchor to bear, which amounted to £155,000. It therefore suited Anchor to argue that a contract had not been formed.

The project then suffered from some setbacks which meant that under the contract, if considered binding, Midas might be required to pay Anchor significant delay liability. As a result, it then suited Midas to change its position and contend that the contract was not executed, to escape the significant expenses of delay liability. Additionally, Midas could claim for remuneration of the works it undertook on a quantum meruit basis. Anchor too changed its position and argued that the contract was valid.

The court was left to address five preliminary issues, one of which was whether the parties had entered into a contractual relationship despite Midas being the only party which had signed the building contract.

Waksman J held:

I reject the contention that the parties intended to be legally bound only when both signed the contract. I find that they intended to be so bound as at 21 July 2014 when Midas signed.

In paragraph 84 of his judgement, Waksman J cited Lord Clarke’s judgment in RTS v Molkerei [2010] that:

It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.

The court held in Anchor v Midas that the essential elements of the contract were agreed. The risk register did not form part of the contract, due to previous evidence showing the parties’ agreement as to how risk was to be apportioned. Moreover, despite Anchor not signing the contact, its conduct and that of Midas who carried out further works, was sufficient for the court to hold a contractual relationship had been established.

Importance

Besides the finding of a contract in circumstances in which one party had not executed it, Waksman J’s comments regarding the quantum meruit valuation of the works offer a warning to contractors and employers that “uncertainty, and with it disagreement, is plainly likely when contractors perform work in anticipation of a final contract that is never formally executed.”

LOI’s remain tools for parties to construction projects to commence works without yet having agreed express terms of contract. It may be that this judgment provides assurances to those in favour of such agreements. However, it remains desirable to have express and clear terms agreed as early as possible to avoid uncertainty throughout and after Practical Completion.

 

If you have any questions relating to this please contact Alex Delin in our Dispute Resolution team.