Beware the dangers of uncertainty with letters of intent

This article was first published on Practical Law.

Introduction

Alexander Nissen QC’s recent decision in Spartafield Ltd v Penten Group Ltd brings a degree of finality to the long-running dispute between these two parties. It comes after multiple adjudications and previous proceedings in the TCC. Back in March, my colleague Ebony Alleyne discussed what was then the most recent judgment, dealing with the enforcement of an adjudicator’s decision.

The current case represents a final court determination of the disputes that were originally adjudicated. Adjudication is, by its nature, a temporarily binding dispute resolution procedure. This final determination of the issues provides an example of how the process works in action. Spartafield’s attempt to challenge the adjudicators decision at the enforcement stage had been predictably unsuccessful, but the door was always open to issue fresh proceedings and obtain a final determination.

The case, and the convoluted procedural history which precedes it, provide a stark example of the dangers of an uncertain contractual position that can arise when significant works proceed under a letter of intent. The decision does not reshape the landscape on contract formation, but it does provide a useful review of the authorities and how they apply to the common situation of an agreement that takes shape over the course of an extended period of time and correspondence. The case is also interesting in its own right as an example of proceedings being conducted expeditiously. The total time from the issue of proceedings to the conclusion of the trial was less than three months. This is a credit to the parties and the TCC.

The issues

The factual background relevant to the case surrounds the parties’ contractual arrangements relating to a development in east London. In July 2013, the parties signed a letter of intent and Penten took possession of the site in September 2013. It was intended that a formal contract would then be agreed between the parties. However, it was disputed whether this did in fact occur before relations soured and work stopped on the project.

The relevant issues for the court to decide were:

• Whether the works proceeded under the letter of intent?
• Whether the JCT ICD 2011 contract was agreed between the parties?
• If the ICD 2011 contract was agreed, the date from which it took effect.

Letters of intent

While perhaps not ideal, significant and lengthy construction works can and do proceed solely under a letter of intent. There are a number of reasons why such a situation may occur, such as Penten’s contention that the work was all subject to a contract that was ultimately not agreed between the parties. It was common ground between the parties that works did proceed under a letter of intent for at least some of the time. The letter of intent had legal effect as a contract between the parties, a point reinforced by the contractual language used and the fact that it was counter-signed by both parties.

Penten’s predicament provides an example of the problems that can arise from an uncertain contractual position based on a letter of intent. In the end, this uncertainty led to Penten expending significant time and money in relation to a number of adjudications, which have now been superseded by the court’s decision.

Contract formation

Spartafield v Penten offers useful guidance on contract formation in a construction context. Ultimately, the court followed the Supreme Court’s decision in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co on contract formation. To this end, the court was required to distinguish between terms that were critical to the formation of the contract and those which, while of economic significance, were not intended to be a precondition to a concluded and legally binding agreement.

Spartafield v Penten makes clear that execution of a hard copy contract is not required in order to conclude a binding contract. This is true even in the case of a JCT contract, which has a standard form of execution. As Mr Nissen stated:

“I am quite satisfied that it is perfectly possible to contract on the basis of a JCT standard form despite it not being executed in the matter contemplated in the Articles, at least where there is no additional requirement for execution under seal.”

As the court recognised, the question is whether the essential terms for a contract have been agreed, even if that means that there is not total agreement as contemplated by a standard form. Following Pagnan SpA v Feed Products [1987] 2 Lloyds Rep 601, this will necessarily be a fact-specific question. In his judgment, Mr Nissen observed:

“…it is for the parties to decide whether particular terms were of economic significance and whether the need for agreement on those terms was a precondition to a concluded agreement.”

As a result, it was held that the ICD 2011 contract was agreed and took effect prior to certain important issues being finalised, such as completing the drafting of collateral warranties.

The danger of uncertainty

Uncertainty arising from letters of intent is nothing new, as was evident in the case of Twintec Ltd v Volkerfitzpatrick Ltd. In Twintec, the defendant had sub-contracted the claimant to undertake work on a concrete floor slab in a large warehouse. A dispute occurred and, after multi-party TCC proceedings had commenced, the defendant referred the dispute to adjudication, on the basis that it was entitled to do so pursuant to the letter of intent. Twintec applied successfully for an injunction to restrain the adjudication, on the basis that the relevant contractual conditions had not been incorporated into the letter of intent and that the referral was therefore invalid.

These cases highlight the potential dangers that can arise from proceeding with works under a letter of intent. As a commercial reality, it will often be desirable and necessary to use a letter of intent in this way. However, parties should be aware of their rights under such a contract and be attentive to the question of when a formal contract has been agreed, which supersedes the letter of intent. Failing to be vigilant over these issues can be a recipe for uncertainty and problems, as both Spartafield and Penten discovered.