All parties routinely involved in construction projects will have come across their fair share of Letters of Intent. On construction projects, parties often come under pressure to commence works or preparations for works as soon as possible and often in circumstances where contract negotiations are not concluded. Materials must be procured or design work carried out to enable contracts to commence in a timely manner. The temptation to turn to a Letter of Intent to allow works to commence on that basis is considerable. However, they are fraught with risk and the recent case of OD Developments v Oak Dry Lining Limited  has again highlighted how risky Letters of Intent can be, particularly when disputes arise.
The OD Developments case involved the enforceability of an adjudicator’s decision to award Oak Dry Lining (the sub-contractor to OD Developments) £431,000 in respect of a dispute concerning its Interim Payment Application No. 21 (IA21).
The Letter of Intent in question stated, in its first paragraph, that “We confirm it is our intention to enter into formal contractual relations with yourselves, for the dry lining, as domestic sub-contractor based on JCT 2011 Design & Build. The following information will be incorporated into, and form part of, any order with ourselves”. What followed was a “list of correspondence forming the basis of the order documentation”. That list named the JCT 2011 Design & Build contract; set out a sub-contract sum; made reference to a timetable and a post-tender interview; and referred to a Schedule of Tender Information.
For reasons, as is often the case, lost in history, the parties never did get round to formally executing the JCT 2011 Design & Build sub-contract. Nor did they specifically agree the sub-contract particulars, such as the method by which Oak’s work would be valued (i.e. measurement basis or adjustment basis). Nevertheless, on 20 occasions, Oak made interim applications which “more or less” followed the JCT procedure.
Approximately 15 months after practical completion, Oak submitted IA 21 in the sum of over £595,000. That valuation was hotly contested and further correspondence crossed between the parties, in which their respective positions differed by over £1.3 million, with each party saying that the other owed it money.
Eventually, Oak submitted to adjudication a dispute concerning the non-payment of IA 21. The adjudicator determined that the terms of the JCT 2011 Design & Build sub-contract were incorporated into the contract between the parties, by their reference in the Letter of Intent. He further concluded that he had jurisdiction to value Oak’s sub-contract works and he proceeded to do so pursuant to the valuation rules in the JCT sub-contract. His determination was that Oak was owed over £431,000.
OD did not pay the adjudicator’s decision. Instead, it issued Part 8 Court proceedings, seeking a declaration that it had served a valid Final Payment Notice, which was binding on Oak because Oak had not challenged in accordance with the JCT Terms. At the same time, Oak pursued its own Part 7 Claim, seeking enforcement of the adjudicator’s decision.
The cases before the Court hinged on the question of whether the JCT 2011 Design & Build sub-contract terms were incorporated into the Letter of Intent by the reference to them in the first paragraph of the Letter of Intent. OD’s case was that the terms were incorporated and that accordingly it had served a valid Final Payment Notice which trumped Oak’s IA 21.
The Court’s conclusion was that the JCT terms were not incorporated, notwithstanding that the Letter of Intent had made reference to the terms and had also listed the “correspondence forming the basis of the order documentation”. The Court’s conclusion was that “it is one thing to agree what particular documents you will have if you execute a JCT contract; it is quite another to say that you have, therefore, included all those JCT terms and conditions at the outset and at the same time”. Moreover, the Court concluded that the statement in the Letter of Intent that “this Letter of Intent is based on your knowledge and acceptance of the JCT contracts stated” meant only that the sub-contract form had been agreed in advance by Oak and that it would be the basis on which a sub-contract was executed if one was executed.
The effect of the Court’s decision was fatal to OD’s claim that its Final Payment Notice had trumped Oak’s IA 21, on which the adjudication had been based. At this point, Oak must have felt that its luck was in. However, the Court’s judgment had one final sting in its tail, namely its decision that, because the adjudicator had purported to determine the value of Oak’s sub-contract works pursuant to JCT measurement rules which were not incorporated into the Letter of Intent, the adjudicator’s valuation determination was made without jurisdiction and was thus unenforceable.
If ever there were an example of litigation benefitting nobody, this case must be it. What the case really highlights is the significant danger, to all parties, of relying on Letters of Intent, especially for protracted periods of time. Whilst they have their uses for ensuring that projects get off the ground promptly, careful drafting is essential and extended reliance on a Letter of Intent is to be strongly discouraged.
If you require advice on Letters of Intent or contract terms generally, please contact Ian Seeley.