Recently, the Technology and Construction Court handed down its decision in the case of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137, which serves as a useful reminder that all parties involved in works being carried out on the basis of a letter of intent need to be mindful of their responsibilities.

Ampleforth engaged Turner & Townsend to project manage the construction of a boarding house at Ampleforth College. The works were time pressured and the contractor was instructed to proceed on the basis of a letter of intent while negotiations continued of the building contract terms and conditions. The letter of intent stated expressly that neither party intended to be bound by the full contract until it was executed by both. As the works continued, it was extended and superseded by further letters of intent. The building contract was never, however, fully agreed and signed.

Disputes arose between the contractor and Ampleforth, including the contractor’s entitlement to an extension of time and payment of prolongation costs and Ampleforth’s ability to deduct liquidated damages for late completion of the works.

The disputes were the subject of mediation and the parties agreed to resolve their differences on the basis that the contractor would not recover its prolongation costs and Ampleforth would not be paid any liquidated damages.

Ampleforth turned to Turner & Townsend for recovery of the lost liquidated damages on the basis that it had been negligent in failing to ensure that the building contract was concluded and executed, such that Ampleforth was unable to enforce its terms (including, crucially, the liquidated damages provisions).

The Court found that Turner & Townsend had failed in its duty to ensure that every effort was made to have a building contract executed. The firm had wrongly “treated the contract as a dispensable luxury” and failed to advise Ampleforth of the need to complete and execute the building contract and the consequences if it was not. Project managers owe their employer a duty to act with reasonable skill and care in the performance of their functions.

With regards to a letter of intent, while there is of course no absolute obligation to procure an executed building contract (on the basis that this may, for many reasons, be outside their control), the project manager must take reasonable steps to finalise and have executed the building contract. The case therefore provides a clear warning to project managers (and other professionals undertaking a similar function). As “coordinator and guardian of the client’s interest” (Royal Brompton Hospital NHS Trust v Hammond (No. 9) [2002] EWHC 2037), efforts to finalise the contractual arrangements are of central importance.

The court considered that:

“The execution of a contract is to be seen not as a mere aspiration but rather as fundamental. It is the contract that defines the rights, duties and remedies of the parties and that regulates their relationship… [Letters of Intent] do not protect, and are not intended to protect, the employer’s interests in the same manner as would the formal contract; that is why their ‘classic’ use is for restricted purposes.”

The judge did not criticise the fact that a letter of intent had been used at the outset of the project – that simply reflected the commercial drivers at the time. The critical issue was what happened afterwards and the recognition, understanding and management of the risks involved. Some basic points for project managers to remember when using a letter of intent:

  • do not use them “unthinkingly” (Cunningham and Others v Collett and Farmer [2006] EWHC 1771 (TCC));
  • understand the nature of the letter of intent in question and the rationale for using it;
  • understand the letter of intent’s effect and limitations (particularly in terms of allocation of risk) and advise the employer accordingly; and
  • make every effort to ensure that the formal building contract is concluded and executed as soon as possible and advise the employer of the risks if it is not done.