Letters of intent: often used and often problematic

Haden Young Limited v Laing O'Rourke Midlands Limited [2008] EWHC 1016 (TCC), underlines the risk for an employer in not finalising the terms of the building contract.

The sub-contract between Hayden Young and Laing O'Rourke was never signed. Despite agreeing the price, scope and quality of the work to be carried out, certain terms were not agreed by the parties, in particular the limit of Haden Young's liability under the:

Works continued, but following practical completion, Haden Young claimed that it was entitled to recover monies on a quantum meruit basis because there was no contract between the parties (see Practice note, Remedies: restitution: Services rendered by the claimant to the defendant (quantum meruit and quantum valebat)). Laing O'Rourke argued that there was a contract because the parties had agreed all the essential terms (see RJT Consulting Engineers Ltd v DN Engineering (Northern Ireland) Ltd [2002] EWCA Civ 270).

However, the court disagreed with Laing O'Rourke. The court concluded that what constituted an essential term for a particular contract was a matter for the parties themselves to decide. In this case, the parties had agreed that both the limit of liability for consequential losses in the sub-contract and the limit of liability under the terms of the collateral warranty were essential terms and no agreement had been reached on them. Accordingly, there was no contract between the parties and Haden Young was entitled to payment on a quantum meruit basis.

Diamond Build Limited v Clapham Park Homes Limited [2008] EWHC 1439 (TCC) underlines the risk for a contractor in carrying out work prior to finalising the building contract.

The parties entered into a letter of intent which stated that, if a building contract was not entered into, the employer would reimburse the contractor's reasonable costs up to a maximum of £250,000. The work proceeded and the contractor incurred costs in excess of £250,000 in a relatively short time. The building contract was never signed. The employer then sent the contractor a notice terminating the contractor's engagement under the letter of intent.

In the subsequent proceedings, the court found the parties had accepted that the terms of the letter of intent would dictate the terms of the parties' relationship until the building contract was signed. As a result, despite the contractor incurring costs in excess of £250,000, the employer had no obligation to reimburse the costs over this amount.