The use of letters of intent has given rise o a number of interesting judgments recently, packed full of practical advice from the judiciary, as Laura Phoenix of Thomas Eggar explains.
Behind the headlines
Classically, a letter of intent is issued to resolve the tension between the need for a design team or building contractor to start work and incomplete contract negotiations.
When last year High Court Judge Keyser QC held that Ampleforth Abbey Trust had suffered loss and damage as a result of negligence and breach of contract by Turner & Townsend Project Management, the headlines taught us that it is negligent for a project manager in TTPM’s position to allow a project to reach completion under consecutive letters of intent, without bringing the probable procurement of a signed building contract to bear with the requisite urgency and focus.
In Judge Keyser QC’s judgment, TTPM failed to take the steps reasonably required of a competent project manager for the purpose of finalising the contract between the trust and Kier, and thereby was negligent and in breach of contract.
Contracts are not a dispensable luxury
The judge held that, in particular, by approaching the situation on the basis that the repeated issue of letters of intent was a proper response to continuing difficulties regarding the execution of the contract, TTPM effectively treated the contract as a dispensable luxury.
Contracts are not a dispensable luxury for either party or their advisers, especially in the current climate where long-standing business relationships are no guarantee of ‘give and take’ when commercial pressures bite.
The decision of the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Co KG (UK Production)in 2010 coupled with the TTPM case teach us:
- Wherever possible, agree the contract first and start work later, this gives both parties contractual certainty.
- If a letter of intent is issued, it is incumbent on the relevant adviser to bring the contract to bear with urgency and focus by preparing a list of impediments to entering into the contract and eliminating them methodically.
- Advisers must regularly and comprehensively advise clients of the remaining impediments and the risk of continuing under a letter of intent.
- The touchstone of an allegation of professional negligence is simply: ‘The standard of the ordinary skilled man exercising and professing to have that special skill’, also named the Bolam test. It follows that advisers must advise their client to take third-party advice where appropriate.
- The consequences of breaking this rule, even with the best of intentions, can be severe. Judge Keyser QC observed that TTPM’s project manager did not understand that the intended contract terms would not apply incrementally with each letter of intent and held that he should have advised the trust to take legal advice.
- Even if the letter of intent says the parties have been dealing on a ‘subject to contract’ basis, this does not exclude the possibility that the necessary implication of their conduct will be that they have waived the requirement of a formal written contract. This is the case even on the express statement in the letters of intent that neither party would be bound by the intended contract, unless and until the contract was signed.
Laura Phoenix is an associate at Thomas Eggar LLP