Blog - 17/09/2012
A cautionary tale for Project Managers in the use of letters of intent
It is not uncommon for letters of intent to be used to kickstart works on site when the finishing touches to the Building Contract are being agreed. Many Project Managers suggest the use of letters of intent with good reason and in the vast majority of cases such letters end up being superseded by the fully signed contract.
This, unfortunately, did not happen in the case of The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited, where no fewer than eight letters of intent were issued and ended up covering the whole of the works.
Ampleforth is a private school in North Yorkshire and it engaged Kier to build a new girls’ boarding house. There was a draft JCT Contract doing the rounds which covered all the usual provisions one might expect including liquidated damages and provisions dealing with extensions of time and loss and expense.
Ampleforth and the contractor got involved in a dispute at the end of the works relating to delay and liquidated damages. Whilst the draft building contract contained a provision for the payment of liquidated damages in the sum of £50,000 per week the letters of intent did not. In fact the letters of intent said that “neither of us will be bound by the intended contract unless and until the written document is executed by each of us.”
Eventually the dispute between Ampleforth and the contractor was settled by mediation. Ampleforth then issued proceedings against its project manager claiming that it had acted in breach of its duty to exercise reasonable skill and care to procure execution of the building contract, and, as a result Ampleforth could not claim liquidated damages against the contractor.
The project manager refuted this and counter-claimed for payment of his fees.
The Court held that the project manager did owe Ampleforth a duty to exercise reasonable skill and care to procure an executed building contract, that it had breached this duty and that Ampleforth had suffered a loss as a result.
In reaching its findings the Court said that whilst the project manager was not under an absolute obligation to ensure that the building contract was signed, it was extremely unusual for a project of this scale (the tender sum was around £4.8 million) to reach practical completion purely on letters of intent and by issuing the letters of intent throughout the project, the project manager failed to take reasonable steps required of a competent project manager to finalise the building contract. The Court said that by approaching the situation on the basis that the repeated issue of letters of intent was a proper response to the continuing difficulties regarding the extent the execution of the contract, it effectively treated the contract as a “dispensable luxury.” The Judge said that the function of the project manager in this context involved the exercise of practical judgement and common sense. He said that the project manager had failed in the following respects:
1. He failed adequately to focus on the matters that remained outstanding before the contract could be signed and to work urgently to resolve those matters one by one;
2. He failed to advise Ampleforth of the need to ensure the contract was signed;
3. He failed to bring proper pressure to bear on the contractor and on the situation generally to that end. For example, the project manager could have let it be known that the third letter of intent was the final one to be issued and that thereafter the contract would have to be signed.
This is an interesting case in that it highlights the importance of the role of the project manager in pushing matters along in the pre-contract stages of a construction project and is a warning against over-use of letters of intent. Whilst they certainly have a clear and useful function in kickstarting construction projects in circumstances where the building contract is in the process of being finalised, it is fundamental to a project that a building contract is actually signed. The project manager’s role in achieving this end is paramount.
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