Reed Smith Client Alerts

It is common practice to enter into a letter of intent to allow a contractor to proceed with limited scope of works while the building contract is being finalised, in an attempt to ensure that the completion of the project is not delayed. This can give rise to problems when negotiations take too long or the building contract is never entered into and, recently, the English courts had to deal with this precise problem in the case of Anchor v. Midas. This alert summarises the court’s decision in the case, and sets out practical tips for developers and contractors when negotiating and entering into letters of intent and subsequent building contracts.

Auteurs: Richard A. Ceeney Martina Antosova

Background

Construction projects are usually very time sensitive, and works often need to start before the parties are able to finalise all the contractual documents. In such circumstances, it is common practice to “bridge the gap” by entering into a letter of intent (LoI). An LoI allows the contractor to proceed with a limited scope of works (such as mobilisation or procurement of materials or long lead-in items) while the building contract is being negotiated and finalised, in an attempt to ensure that the project completion date is not delayed by the negotiation of legal terms. However, problems can arise if the contract negotiations take longer than expected or the contract is, in fact, never entered into. This is what led to the dispute between Anchor and Midas that was heard by the English Technology and Construction Court (TCC) earlier this year.1

The facts of this case are quite messy, but it is easy to see how they came about.

Following a tender process, Anchor selected Midas as the contractor to design and build a new retirement community at Yateley, Hampshire. The parties agreed to enter into an amended JCT Design and Build Contract (the ‘Building Contract’) but this was not concluded before the works were due to start. They therefore entered into a number of successive LoIs and the last LoI entered into expired on 30 June 2014.

Midas signed the Building Contract on 21 July 2014 and apparently considered it to have been entered into on that date. Before it was signed by Anchor, the contract documents were found not to be as Anchor was expecting or believed to be agreed: in particular, Midas had included a risk register which reopened negotiation points that Anchor had considered previously closed, in particular, responsibility for site conditions.

Before the dispute over the correct formulation of the Building Contract was resolved, the project had fallen into delay and Midas was exposed under the Building Contract to significant delay liability. At that point, the positions of the parties changed and it suited Midas to contend that the Building Contract had not been entered into (and it suited Anchor to contend the reverse). In addition, if Midas’ argument that the Building Contract had not been entered into were successful, Midas would be entitled to a payment of a significantly higher sum for the works.

The key question to be resolved was: had the Building Contract been entered into, or was Midas excused from delay liability and entitled simply to payment of its reasonably incurred costs?