The case of 19 Bolsover Street – the pitfalls of Letters of Intent

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Regular readers will recall previous briefings warning of the dangers of using Letters of Intent (LOIs).

The decision in OD Developments v Oak Dry Lining further highlights the dangers and consequences of not executing a contract following a LOI.

The issue in this case was whether the adjudicator had jurisdiction to determine that the subcontract incorporated the terms of the JCT D&B Subcontract 2011. The outcome is here.

Whilst a LOI can take many guises, in general terms it is a document that expresses an intention that the parties will enter into a formal contract at a later date and, in the meantime, requests the other party to carry out works prior to the finalisation of the contract.

Facts

OD Developments (“OD”) employed Oak Dry Lining (“Oak”) under a LOI to carry out dry lining works.

It was the parties’ intention that they would sign up to a JCT 2011 Design and Build Subcontract (“JCT Sub-Contract”).

The LOI contained the following statement: “This Letter of Intent is based on your knowledge and acceptance of the JCT contract stated”

The JCT Sub-Contract was never formally executed and Oak carried out the subcontract works as referred to in the LOI.

The parties operated certain provisions of the JCT Sub-Contract, including the terms relating to final payment.

A dispute arose concerning the value of the final payment and the validity of OD’s final payment notice. OD argued that it had overpaid Oak to the tune of £625K. Oak claimed it was entitled to £765K and referred the matter to adjudication.

The adjudicator decided that the JCT Sub-Contract terms were incorporated into the Sub-Contract on the basis that the parties proceeded on those terms.

The adjudicator also decided that, as a matter of substance, OD’s final payment notice was not valid and so did not become conclusive as to the sums due under the Sub-Contract. The adjudicator then undertook his own valuation of the works and decided that Oak was due a net sum of £431K.

OD commenced Part 8 Proceedings seeking declarations and Oak sought to enforce the Adjudicator’s decision. Both were heard together.

Arguments put forward in the TCC

OD asserted that its final payment notice had become conclusive as to the sums due under the Sub-Contract. It argued that:

  • The sub-contract did incorporate the JCT Sub-Contract terms;
  • its final payment notice was served pursuant to the JCT Sub-Contract terms and was therefore valid; and
  • As Oak had not issued proceedings to challenge the final payment notice within ten days, as required under the JCT Sub-Contract terms, the notice became conclusive and, therefore, OD was entitled to judgment in the sum of £625,000.

Oak argued that the contract did not incorporate JCT Sub-Contract terms and so OD was not entitled to rely on its final payment notice. It therefore sought enforcement of the adjudicator’s award of £431K.

Issues

The Court had to consider:

  • Whether there were any “regulated” terms and conditions and, if so, were these the JCT Sub-Contract terms?
  • If the JCT Sub-Contract terms were incorporated, had OD’s final payment notice been validly served and therefore become final and conclusive?
  • If there were no such terms, then did OD’s Final Payment Notice have any contractual effect?

In reviewing the contents of the LOI, the Court rejected the argument that the wording “This Letter of Intent is based on your knowledge and acceptance of the JCT contract stated” meant that Oak had agreed to the incorporation of the JCT Sub-Contract terms.

Conclusion

The Court determined that the JCT Sub-Contract terms and conditions were not incorporated into the LOI and, on that basis, OD’s Part 8 claim failed.

The Court also determined that, as the adjudicator proceeded on the incorrect assumption that the JCT Sub-Contract terms were incorporated, the adjudicator’s decision was unenforceable.

The correct approach was that Oak’s works should be valued on a quantum meruit basis.

Comments

It’s easy to see why parties decide to proceed on a LOI. Construction contracts can be quite technical and can take parties a long time to agree all the details.

There may also be commercial pressures to organise supply chains, procure materials, and commence site preparations as soon as possible while the parties continue to negotiate commercial terms.

However, this case provides a salient reminder of the inherent dangers of using LOIs and the consequences if the parties fail to make it clear what terms are intended to apply.

If in any doubt, seek appropriate legal advice.

LINK TO JUDGMENT:  https://www.bailii.org/ew/cases/EWHC/TCC/2020/2854.html