Letter of Intent can be Contract under Construction Act

For there to be a valid construction contract within section 107 of the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act 1996”) there must be agreement on at least four essential items: the parties, the scope of work, the price and timings.

In Glendalough Associated SA v Harris Calnan Construction Co Ltd [2013] EWHC 3142 (TCC) (21 October 2013) Glendalough put the works out to tender in September 2009. Harris Calnan Construction Co Ltd (“HCL”) submitted a tender, which was subsequently revised, and by a letter dated 24 February 2010 Glendalough instructed HCL to proceed with the works pending agreement of a formal contract based the “JCT 2005 Intermediate Form of Contract with Contractor’s Design”.

HCL said that no formal contract was ever entered into and HCL carried out and completed the works under, it now claimed, the terms of the letter of intent. However, the work took longer than anticipated and Glendalough asserted that it was entitled to deduct liquidated damages for the delay. On 1 July 2013 its then solicitors, RPC, issued a Withholding Notice in which it was alleged that HCL was 64 weeks in delay and therefore had a liability for liquidated damages in the sum of £250,000.

HCL disputed this. The following month it referred the dispute to adjudication and an adjudicator was appointed.

However it now said the work had been done not under a construction contract but the three paragraphs of a letter of intent which were designed to be a fall-back position, only relevant at all if (as had occurred) no formal/full contract was ever concluded. In short that it was designed to provide a very basic framework that would only be operated if, contrary to all expectations, a formal/full contract was not agreed. By definition, at the time that it was written, it could not allow for or address future events, such as the particular workscope that might be required or ordered.

It was a simple safety net to regulate the parties’ relationship if no formal/full contract was agreed. The three paragraphs in the letter of 1st November were not themselves designed to be a complete record of the parties’ proposed agreement. They could not be; if they had been, there would have been no need for a formal/full contract at all.

Rejecting these arguments the Court said the case was potentially within the Construction Act 1996 and it’s adjudication provisions on the following grounds:

1 There was clearly no doubt as to the identity of the contracting parties.

2 The scope of the work was described by reference to the drawings and instructions issued by the architect, which were in turn identified in the tender documentation referred to in the letter. It was also clearly the intention of the parties that the procedures to be followed would reflect the contractual machinery of the JCT 2005 contract. This would mean that, for example, any instructions to vary the work would have to be issued in accordance with the requirements of that form of contract, which, amongst other things, would mean that they would be in writing.

3 On the question of the price. It was often inherent in the nature of default provisions such as these that the price had not been agreed. Unless a failure to agree on a price is always to be fatal to the creation of the construction contract, the relevant question was whether or not the parties had agreed upon a satisfactory means of ascertaining the price. For example, simply to agree that the contractor was to be paid a fair price for the work carried out may be too uncertain if no machinery had been agreed upon for establishing how a fair price was to be assessed.

In the present case the letter stated that HCL was to be paid the reasonable cost of the works carried out based on their tender. The Court took this to mean that the cost of the work was to be assessed by reference to the rates and prices set out in HCL’s tender. It was reasonable to assume that the tender would contain rates and prices applicable to the work shown in the architect’s drawings, so that unless the works were varied in any significant respect one would expect there to be a rate or a price for all the different parts of the work. Thus calculation of the reasonable cost of the work would involve measurement of the work carried out and then the application of the tender rates and prices to those measured quantities. This seems to the Court to provide a sufficiently certain method of ascertaining what is a reasonable price.

The decision of Ramsey J in PTB v ROK shows that the absence of agreement on a contract price will not be fatal to the existence of a construction contract provided that there is an agreed written record which identifies rates that are to be applied to the work carried out. The default provision in the letter of intent, when read in the context of the letter as a whole, satisfied this requirement.

4 The final ingredient was that of time. The letter of intent specified the commencement date for the work and a final completion date. The letter of intent required the works to be carried out “in a diligent and timely fashion as provided for herein”. That obligation further supported the contractual effect of the letter.

As these 4 findings were consistent with matter being within the adjudicator’s jurisdiction under the Construction Act 1996 the Court referred the factual decisions back to the Adjudicator.

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