Construction industry – take care when starting work with a ‘letter of intent’

The far reaching implications of a 'letter of intent', and the potential liability which may arise as a result, have been highlighted after the Court of Appeal decided that a 15-year-old letter between an employer and a contractor did indeed amount to a contract.

The case - Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd [2018] - is particularly pertinent because in the construction industry, perhaps more than any other, work is carried out based on unsigned contracts and letters of intent, sometimes leading to significant problems down the line.

It shows just how risky failing to execute a formal contract can be in the face of a defects claim and underlines the importance of caution when it comes to a letter of intent and deciding exactly what its terms should be.

Letter dating back to 2002

AMEC wanted to instruct Arcadis to perform design work on its construction projects. AMEC and Arcadis had exchanged three sets of terms and conditions by 2002. All of these included a cap on liability which had not been rejected by either party. Negotiations were ongoing regarding some of the terms but AMEC required Arcadis to start work urgently. AMEC sent Arcadis a letter of intent to provide some comfort that Arcadis would be paid for its work. The letter of intent referred to "the terms and conditions we are currently working under with yourselves".

AMEC considered Arcadis' work to be defective and sought to recover loss of around £40 million. Arcadis sought a declaration from Court that AMEC were limited in recovering a maximum of £610,515 in line with the liability cap contained in the terms and conditions. The question for the Court was: could the liability cap referred to in the draft terms and conditions be incorporated into the letter of intent when the terms and conditions were never finalised?

In a ruling that has been broadly welcomed by the industry, the Court of Appeal, held that the liability cap had been incorporated into the letter of intent from 2002 despite the fact the terms and conditions were never finalised.

Reflecting the commercial reality that sometimes interim agreements have to be interpreted from a string of communications and the conduct of both parties, it also acknowledged that there isn't always time to get every point agreed before starting work. The Court of Appeal came to the conclusion that Aracadis would not have entered into the interim agreement via the letter of intent unless there had been a liability cap in place as described in the draft terms and conditions.

Avoiding problems

Ensuring that the scope of a letter of intent is clearly defined is key if work is to start before contracts are signed.

From the contractor's point of view, it's vital to stop work once the financial limit outlined in the letter of intent has been reached. Going beyond it means you might not get paid for any further costs incurred.

Employers should make sure they don't allow the contractor to continue working or embark on new work after a letter of intent expires as the contractor might then be entitled to payment on a quantum meruit basis, meaning the payment of a reasonable sum in respect of services.

For help and advice about this area of the law, please contact Wards Solicitors' James Murray. He specialises in disputes involving construction and engineering projects and is a member of The Technology and Construction Solicitors Association (TeCSA), the leading organisation for solicitors practising construction and information technology law in England and Wales.