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The risk in letters of intent and the related duties of project managers

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Posted on 22 October 2012

Letters of intent are widely used in the construction sector where the employer wants to get on with the project and does not want to, or cannot, wait until the building contract has been negotiated and signed.

The nature of letters of intent inevitably give rise to disputes: the courts have repeatedly highlighted the inherent risks of relying on a letter of intent rather than a concluded contract. This inherent risk in letters of intent, along with the duties of project managers, was scrutinised in a recent case¹ before the specialist Technology and Construction Court this year.   The case was brought by the Trustees of Ampleforth Abbey Trust against the Trust’s project managers, Turner & Townsend Project Management Limited (“T&T”).  The works were commenced under a letter of intent prepared and advised on by T&T, on the assumption, no doubt, that the building contract would be negotiated and entered into in due course.   

The works continued. Although the building contract was under negotiation, further letters of intent prepared by T&T were issued to the building contractor. The planned date for completion came and went. Still no signed contract. 

The contractor eventually completed the works, but much later than planned. At that point Ampleforth reached for the (unsigned) contract. They wanted to be able to deduct the liquidated damages in the contract of £50,000 per week against their contractor. This would have meant Ampleforth could deduct £750,000 from monies otherwise due to their contractor for the delays. However, because the building contract had still not been concluded, the Trust could not recover those liquidated damages. It blamed T&T for failing to procure the executed building contract or warn the Trust of the risks in not getting the contract executed. 

The matter came before the courts earlier this year, with judgment given in July. The court found that T&T had been negligent by not doing enough to try and get the contract signed by the contractor. It also held that T&T were negligent in failing to provide sufficient warning and advice to the Trust of the risks in not getting the contract in place. 

This case serves as a warning for both employers and project managers. It highlights the very serious risk in not putting a building contract in place and just relying on letters of intent. In this case, serial letters of intent were issued reducing the chances that the building contractor would agree to enter into the contract.  

For project managers the case highlights the importance of taking adequate steps to try and get the building contract executed by the parties. Sometimes that may not be possible, but certainly in this case the court found that T&T had not done enough in that regard. Similarly, a project manager must warn his client of the risks of relying on letters of intent, and the consequences of not getting a building contract in place quickly enough. 

¹ The Trustees of Ampleforth Abbey Trust v Turner and Townsend Project Management Limited [2012] EWHC 2137 (TCC)

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