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Construction Contracts Operation and Administration

Table of Contents

1. Meadow Gardens Project

1.1 Introduction

1.2 Termination

1.3 Consequences of termination (Clauses 8.4 to 8.6).

1.4 Payment

1.5 Settlement of outstanding claims

1.5.1 – Relevant Contract Provisions

1.5.2 Claim 1 – Additional Work

1.5.3 Claim 2 – Additional Work Site Conditions

1.5.4 Claim 3 – Provisional Sum

1.5.5 Claim 4 – Inclement Weather

1.5.6 Claim 5 – Client Design Changes

1.5.7 Claim 6 – No payment notice issued for latest application.

1.5.8 Claim 7– Ground Excavation

1.5.9 Summary of claims

1.6 Subcontractor Best bricks

1.7 Conclusion

2.0 Contract Selection – NEC 4 Option A versus JCT Design and Build Contract 2016

2.1 Contractor design responsibility

2.2 Variations to time and/or Costs

2.2.1 Extension of time/ Loss and Expense claims

2.2.2 Provisional Sums

2.2.3 The use of time-bars preventing claims for extension of time and/ or payment of additional cost

2.3 Site/Ground Conditions

2.4 Programme

2.5 Risk Management

2.6 Completion

2.7 Quality

2.8 Dispute Resolution Provisions

2.9 Termination

2.10 Insolvency

2.11 Conclusion

3 The Impact of only issuing a letter of intent

3.1 Introduction

3.2 Advantages

3.3 Disadvantages

3.3.1 Ambiguity as to whether a letter of intent constitute and contract and if so what terms

3.3.2 Price and Payment

3.3.3 Liability

3.3.4 Disputes

3.3.5 Changing from Letter of intent to Agreed Construction Contract

3.3.6 Conclusion

Bibliography

Table 1

1.       Meadow Gardens Project

1.1    Introduction

The purpose of this document is to advise Percy Land of the outstanding matters that need to be addressed with respect to the following, as a subsequent result of the insolvency of Cheapest Build.

  • Contract termination
  • Settlement of outstanding claims
  • Final Payment.

Venti consultant’s report is based on the express provisions contained and agreed by both parties under the JCT design and build contract 2016 coupled with relevant case law in order to address and advise on the matters that have transpired.

1.2    Project status

Cheapest Build Ltd have gone into liquidation and have therefore become insolvent. The Project “Meadow Gardens” is on a 52 Week programme. We are now on the first day of week 25. The Groundworks, substructure, superstructure and windows have been installed and the roof is 80% complete. This has all been to programme.

1.3    insolvency and Termination

Insolvency is the inability of a party to pay its depths (Hawkins, 1993). Under section 8, clause 8.1 a company becomes insolvent when it enters administration within the meaning of Schedule B1 of the insolvency act 1986.

Termination subsequently takes effect when notice, under clause 8.5.1 and 8.10.1 is given. This notice however must be in writing, as denoted under clause 8.2.3.

From the onset the Contractor’s obligation to carry out the works is suspended (clause 8.5.3.2 and 8.10.3). The only way for works to continue is by the Contractor is by way of an agreement in the form of a novation from a third party who assumes the obligations of the insolvent Contractor.

The Contractor (Cheapest Build) are obligated to immediately notify the Employer (Percy Land Ltd)  if they make any proposal, give notice of any meeting or become the subject of any proceedings or appointment relating to any of the matters referred to in clause 8.1(DB 2016, cl.8.5.2).

1.4    Consequences of termination (Clauses 8.4 to 8.6).

  • As a consequence of termination, under clause 8.5 the Employer (Percy Land) may, in accordance with Clause 8.7 employ and pay other persons to carry out and complete the Works and to make good any defects of the kind referred to in clause 2.35,
  • He and they may enter upon and take possession of the site and the Works and (subject to obtaining any necessary third party consents) may use all temporary buildings, plants, tools, equipment and Site Materials for those purposes. (DB 2016, cl.8.7.1).

Clause 8.7.1 states that the Contractor shall

  • When required in writing by the Employer to do so (but not before) , remove or procure the removal from the works of any temporary buildings, plant, tools, equipment, goods and materials belonging to the Contractor or Contractor’s persons
  • Provide the Employer with copies of all the Contractor’s design documents then prepared, whether or not previously provided. The Employer is not charged for providing this information.
  • If so required by the Employer within 14 days of the date of termination, assign (so far as assignable and so far as he may lawfully be required to do so) to the Employer, without charge, the benefit of any agreement for the supply of materials and goods and/or for the execution of any work for the purposes of this contract.

Clause 2.3 (Possession) will no longer apply with regards to non-entitlement to possession of the site inclusive of the works and subject to any necessary third party consents take possession.

Under clause 7.2 the employment of the main contractor is automatically determined, but may be reinstated, subject to the agreement of the liquidator.

1.5    Payment

Under normal circumstances a Contractor would be entitled to payment for certified sums and if there is no pay less notification from the Employer, which can be enforced through adjudication or through the courts.

However under clause 8.7.3 no further sums become due to the Contractor under the JCT Contract other than any amount that may become due to him under clause 8.7.5 or 8.8.2 and the Employer need not pay any sum that has already become due either.

The above has been exercised by the courts in (Melville Dundas Limited -v- George Wimpey UK Limited & Norwich Union Insurance Limited, 2005) where the Contractor had become insolvent after the final date for interim payment of a sum due and the Employer had then exercised his contractual right to determine. In the aforementioned case it was held that upon determination of the contract the interim payment was no longer payable. The clause was not contrary to section 110 of the housing grants, construction and regeneration act 1996 whereby payments cannot be withheld unless the correct withholding notices have been served; and Clause 27.6.5.1 was not subject to the notice requirements and that upon determination of the contract the interim payment was no longer payable

Therefore it would be construed that where no pay less notice is given that a sum can be withheld if termination is on grounds of insolvency, due to the express provisions contained within the JCT form of contract.

1.5 Settlement of outstanding claims

The purpose of this section is to review Cheapest Builds outstanding claims and to ascertain their entitlement based on the information provided.

1.5.1 – Relevant Contract Provisions

Under clause 8.7.4, following completion of the works and the making good of defects the in them the (or of instructions otherwise, as referred to in clause 2.35), an account of the following shall within 3 months thereafter be set out in the statement prepared by the Employer

The amount and expenses properly incurred by the Employer, including those incurred pursuant to clause 8.7.1 and where applicable, clause 8.5.3.3, and of any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise

The amount of payments made to the Contractor; and

The total amount which would have been payable for the works in accordance with this Contract;

Under clause 8.7.5 if the sum of the amounts stated under clauses 8.7.4.1 and 8.7.4.2 exceeds the amount stated under clause 8.7.4.3, the difference shall be a dept. payable by the Contractor to the Employer or, if that sum is less, by the Employer to the Contractor.

1.5.2 Claim 1 – Additional Work

Cheapest Build Ltd purport that they were verbally instructed in site to change the paving materials from red to grey and are seeking £5,000 in compensation. Cheapest Build Ltd failed to issue a notification or confirmation of the change. Percy Land have not confirmed under clause 4.24.5 of such an instruction and claim no verbal instruction was ever given.

Clause 3.7.1 of the JCT Design and Build Contract reads:

“Where the Employer gives an instruction otherwise than in writing, it shall be of no immediate effect but the Contractor shall confirm its terms in writing to the Employer within 7 days, and, if he does not dissent by notice to the Contractor within 7 days from receipt of the Contractor’s confirmation, it shall take effect as from the expiry of the latter 7 day period.”

Therefore an oral instruction has no immediate effect and only transforms into a formal instruction when written confirmation and the Employers failure to contradict that confirmation. Cheapest Build Ltd have failed to adhere to the contractual provisions that govern verbal instructions and have therefore no entitlement to the additional costs. However if the Employer’s requirements stipulate “paving materials are to be red”, would it be fair and reasonable to dismiss the Contractor’s claim as a result of not adhering to the express provisions of the contract, as denoted within (Sutcliffe v Thackrah, 1974)

“The employer and the contractor make their contract on the understanding that in all matters where the architect has to apply his professional skill he will act in a fair and unbiased manner in applying the terms of the contract”.

1.5.3 Claim 2 – Additional Work Site Conditions

Cheapest Build Ltd are claiming £5,000.00 for the site conditions not being in accordance with what was agreed and as a result extensive cleaning of illegally dumped waste prior to works commencing.

No clause within the JCT design and build contract 2016 makes reference to unexpectedly adverse site conditions. It would appear that in the absence of any express contractual provisions the risk would appear to fall on the Contractor (Hudson, 2017). Venti Consultants therefore believe Cheapest Build Ltd have no contractual entitlement to the additional costs associated with the existing site conditions.

1.5.4 Claim 3 – Provisional Sum

There was a provisional sum included in the Contract for cladding panels to be used on one elevation. Cheapest Build Ltd have stated that the ones finally agreed have cost a lot more than the provisional sum allowed. These have not yet been installed and currently stored on site. In (Midland Expressway Ltd v Carollion Construction Ltd & Others, 2005) it was held that where provisional sums are used the Contractor should be compensated actual cost. Provisional Sums are valued in accordance with clause 5.2 which states that all work executed by the Contractor in accordance with Employer’s instructions (clause 3.11 for provisional sums) as to the expenditure of Provisional Sums included in the Employer’s requirements shall be such amount as is agreed by the Employer and the Contractor or, where not agreed, the amount valued (a Valuation) in accordance with clauses 5.4 to 5.7. Based on the information provided Cheapest Build Ltd are entitled to the additional costs associated with the cladding panels. In terms of time this would be dependent on whether the provisional sum is “defined” or “undefined”. It would appear that Cheapest Build Ltd are merely claiming the extra over additional costs associated with the cladding panels.

1.5.5 Claim 4 – Inclement Weather

Cheapest are claiming £35,000 due to inclement weather at the start of the job. Exceptionally adverse weather is a relevant event under Clause 2.26.8. The meaning of “exceptionally adverse” however is not defined within the contract. Notwithstanding the aforementioned exceptionally adverse weather is not a relevant matter and therefore whilst the Contractor may have entitlement to time there will be no entitlement to loss and expense associated with adverse weather conditions under clause 4.24. Cheapest Build Ltd therefore have no entitlement to the additional costs associated with inclement weather.

1.5.6 Claim 5 – Client Design Changes

Cheapest Build Ltd are claiming £70,000 for design changes. Design liability and limitations is governed by clause 2.17. Discrepancies and divergences are covered under clause 2.10 – 2.14.  As denoted within clause 2.11 the Contractor shall not be responsible for the Employer’s requirements or for verifying its adequacy of the design contained within. Clause 2.12.1 states that any correction, alteration or medication under clause 2.12.1 shall be treated as a change. The Contractor is obligated to give notice of any inadequacy he becomes aware of, as denoted within clause 2.13, the Employer shall then issue instructions in that regard.

It is important to ascertain whether the design change is derived from either

  • The Contractor’s proposal/or other Contractor’s Design documents or
  • Due to a discrepancy within the Employer’s requirements.

Clause 2.14.1 states that if the discrepancy is within or between the Contractor’s proposal and/or the Contractor’s design documents any proposed amendment to resolve such discrepancy shall be for the Contractor’s cost. Under Clause 2.14.2 if the discrepancy is found within the Employer’s requirements the Contractor’s proposal shall prevail without any adjustment to the sum.

Where the Contactor’s proposal does not deal with a discrepancy the Contractor shall notify the Employer of his proposed amendment to deal with it and the Employer shall either agree with the proposed amendment or decide how the discrepancy is to be dealt with; that agreement or decision shall be notified to the Contractor and treated as a change.

There is not enough information provided to ascertain whether clause 2.14.1 or clause 2.14.2 applies however it would appear that the 2 weeks relates to changes in the Employer’s requirement and it is therefore assumed, based on this premise that CheapestBuild Ltd have entitlement to the additional costs associated with this design change.

1.5.7 Claim 6 – No payment notice issued for latest application.

As denoted under clause 4.7.5 Percy Land have an obligation to provide a payment notice no later than 5 days after each due date stating the sum that they consider due at the relevant due date at the relevant due date in accordance with clauses 4.12 to 4.14. Clause 4.9.4 states

“If a Payment Notice is not given in accordance with clause 4.7.5, the Employer shall, subject to any Pay Less Notice under clause 4.9.5, pay the Contractor the sum stated as due in the interim payment application”

The draconian consequences  associated with failing to issue valid payment notices and payless notices can be seen in  (Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd, 2017) and (ISG Construction Ltd v Seevic College, 2014) where the courts demonstrated that where a Contractor correctly applied for payment and the employer had failed to serve a valid payment or pay less notice the paying party must pay the sum due which has been applied for. However in this particular case, as a result of the Contractor becoming insolvent, as denoted under clause 8.7.3 as previously mentioned under payment (1.4) no further sums become due to the Contractor under the JCT Contract other than any amount that may become due to him under clause 8.7.5 or 8.8.2 .The Employer (Percy Land) therefore need not pay any sum that has already become due either. The amount due (if any) does not become due until completion of the works (clause 8.7.4)

1.5.8 Claim 7– Ground Excavation

Cheapest Build are seeking compensation of the amount of £5,000 for an instruction received from Percy Land to excavate ground and reveal the depth of the foundations which were subsequently discovered to be built to the correct depth.

Clause 3.12 states

“The Cost of that opening up or testing (including the cost of making good) shall be added to the Contract Sum unless provided for in the Employer’s Requirements or in the Contractor’s proposals or unless the inspection or test shows that the materials,goods or work are not in accordance with this contract”.

Based on the premise that the foundations were built to the correct depth Percy Land are obligated to pay the additional £5,000 for the additional excavation works.

1.5.9 Summary of claims

Based on the information provided the below Table concludes what amount is now due to Cheapest Build Ltd.

Table 1

1.6 Subcontractor Best bricks

Unless a contract expressly permits, Percy Land is neither obliged nor entitled to make a payment that includes amounts owed to a sub-contractor (or a sub-sub-contractor or supplier). Should Percy land make such a payment they run the risk of also paying twice as illustrated in (Tate Building Services v B&M Mchugh Ltd, 2014)

If a payment is made to a nominated subcontractor directly after the Contractor has become insolvent there is the potential risk of having to make a second payment to the receiver/liquidator  (British Eagle International Airlines Ltd v Compagnie Nationale Air France, 1975).

Best Bricks may regard Percy land as a guarantor of Cheapest Builds payment but without the proper formalities there is no enforceable right to payment. The case of (Actionstrength Ltd (t/a Vital Resourses) v International Glass Engineering IN.GL.EN SpA (‘Inglen’) (1) St Gobain Glass UK Limited (2), 2003) demonstrates why.

Venti Consultants advise Percy Land that whilst there are other associated risks with not making the payment to Best Bricks such as added time and cost, taking into consideration the above we would advise against this direct  payment to best bricks.

1.7 Conclusion

Upon review of the current anomaly that Percy Land face in relation to the insolvency of Cheapest Build Ltd Venti Consultants would advise Percy Land to take the following approach.

  • Obtain proof of entitlement to terminate, such as a letter confirming appointment of the liquidator of Cheapest Build Ltd;
  • Whilst Percy Land may have a compensate a large amount of the £1,120,000 claimed by Cheapest Build for works complete to date, in accordance with the relevant provisions of the contract no payment should be made until final settlement, in accordance with clause 8.7.4 and 8.7.5;
  • The only way for works to continue with Cheapest Build Ltd is by way of an agreement in the form of a novation from a third party who assumes the obligations of the insolvent Employer and Contractor, taking into consideration that they are currently on Programme Venti Consultants would recommend exploring the potential of reinstating Contractor Cheapest Build Ltd;
  • Issue  a notice to terminate in accordance with clause 8.5.1;
  • Take reasonable measures to ensure that the site, the Works and Site Materials are adequately protected in accordance with clause 8.5.3.3
  • Send invitation to tenders to prospective Contractor’s in order to ascertain the viability of another Contractor taking on the remaining works should the reinstatement of Cheapest Build Ltd not constitute a viable option.

2.0 Contract Selection – NEC 4 Option A versus JCT Design and Build Contract 2016

The purpose of this section is to provide an alternative option to the JCT Design and Build 2016 form of contract for Percy Lands next project. Venti Consultants proposed alternative is the NEC 4 Option A form of contract. The purpose of this report is to illustrate the key differences that exist between both contracts under the following headings.

  • Contractor design responsibility;
  • Variations to Time and/or Costs;
  • Site/Ground Conditions;
  • Programme;
  • Risk Management;
  • Completion;
  • Quality;
  • Termination;
  • Insolvency.

2.1 Contractor’S design responsibility

Where deign is carried out by the Contractor , the extent of that liability will depend upon whether the Contractor has undertaken an obligation to produce a design which is fit for purpose or a design which is limited to reasonable skill and care. If the design is fitness for purpose the Contractor will be responsible for any defects in the design (Steel Co of Canada Ltd v Willand Managment Ltd , 1966), irrespective of whether or not the design was carried with reasonable skill and care. When applying reasonable skill and care the test applied would be the bolam test (Bolam v Frienr Hospital Managment Committee, 1957).

The JCT D & B 2016 form of contract states under Clause 2.17.1 that design standard is intended to be the same as that of any independent architect or other professional designer directly employed by the employer and claiming to be competent to undertake work of this type, which is similar to reasonable skill and care.

Under the NEC 4 Option A form of contract if option X15.1 is adopted this limits the Contractor’s liability to reasonable skill and care.

The NEC 4 Option A Clauses X15.1 and X15.2 state the following

  • X15.1 The Contractor is not liable for a Defect which arose from its design unless it failed to carry out that design using the skill and care normally used by professionals designing works similar to the works.
  • X15.2 If the Contractor corrects a Defect for which it is not liable under the contract it is a compensation event.

It would be perceived that the same level of design responsibly would be equally applicable under the NEC Option A contract where X15 is used in comparison to the  JCT D & B 2016 form of contract (Clause 2.17.1), i.e. the standard of the ordinary skilled man exercising and professing to have that special skill.

Where Option X 15 is not chosen this would impute that the intention of the parties is of a higher duty with the finished product being suitable for the purpose for which the Contractor knows its required (Greaves & Co Ltd v Bayman Meike , 1975)

2.2 Variations to time and/or Costs

2.2.1 Extension of time/ Loss and Expense claims

The JCT D & B 2016 form of Contracts splits claims for time and cost separately into relevant matters and relevant events. Payment for additional cost are known as ‘Relevant Matters’ as detailed under clause 4.24. Events entitling for an extension of time are known as ‘Relevant Events’ as detailed under Clause 2.29.

The NEC contract has compensation events which deals with both time and money under clause 60.1, therefore each compensation event triggers the re assessment of the prices, completion dates and any key dates. This allows time and cost to be dealt with in a more timely manner shortly after the change occurs and allows the Project Manager with a better forecast of the final completion and final cost payable allowing actions to be taken early where time and cost constraints are crucial.

The way in which the JCT and NEC deal with change are somewhat different, the NEC takes a more objective approach, for example when dealing with weather the JCT makes reference to “exceptionally adverse weather conditions under 2.26.8 whereas the NEC is subjective in its approach whereby a 1 in 10 year approach to weather is applied under clause 60.1(13)

2.2.2 Provisional Sums

The NEC 4 suite of contracts does not facilitate the use of provisional sums, this being based on the premise that if you cannot clearly define an aspect of the works you should not include it in the contract. The NEC 4 suite of contracts deals with unknown items via the compensation event procedure.

Under the JCT form of contract Provisional sums can be included and are instructed under clause 3.11 of the conditions of contract and are valued in accordance with clauses 5.4 to 5.7 (‘the Valuation Rules’)

2.2.3 The use of time-bars preventing claims for extension of time and/ or payment of additional cost

The JCT D & B 2016 has no express time bars in the contract, although there are timescales upon which the Contractor should be aware of, namely clause 2.24 (Notice by Contractor of delay to progress)  and 4.20 ( Loss and Expense – notification and ascertainment).

Under the NEC 4 conditions of contract clause 61.3 second sentence deals with the consequences of not notifying a compensation event within 8 weeks of becoming aware which states

“If the Contractor does not notify a compensation event within eight weeks of becoming aware of the event, he is not entitled to a change in Prices, the Completion date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not”.

2.3 Site/Ground Conditions

As there are no express provisions within the JCT form of Contract for site/ground conditions would be the responsibility of the Contractor, the NEC 4 Option 4 conditions of contract deals with adverse physical conditions under clause 60.1(12).

The physical conditions need not be totally unforeseeable, but the chance of them occurring must be such that it would not have been unreasonable for an experienced Contractor to allow for them, taking into account the site information, publicly available information referred and other information which an experienced Contractor could reasonably be expected to have to obtain.

2.4 Programme

JCT D & B 2016 does not expressly deal with programme requirements. The Programme under the NEC 4 Option A form of Contract is central to the management and administration of the contract and the way in which it deals with progress, delay and changes to the completion date, this is illustrated under the contracts extensive programme obligations, as denoted within Clause 11, 31, 32 and 50.3 and is demonstrated from the offset due to the Contractor’s is incentive to produce its first programme  as the consequential implications if he does not  allows the Project Manager to withhold one quarter of the price of work done until such time that the fist programme is submitted with the programme having to adhere to the requirements set out under clause 31.

The NEC 4 option A form of contract also provides for key dates to be provided in the event it is necessary to have stated deliverables or outcomes by stated dates, where sectional completion is not appropriate. NEC further allows for incentivising the contractor to finish early through an option for a bonus for early completion provision.

2.5 Risk Management

A further feature of NEC is its early warning process under clause 16 where both the project manager and contractor are required to notify each other of any matter which could affect time, cost or quality. The earliest indication of such a problem followed by a risk reduction meeting allows the contractor and project manager to focus on avoiding/reducing the problem as best they can, this being in the interest of both parties to the contract. This simple risk management tool is designed to encourage a ‘no-surprise’ approach by both parties to the contract and has considerable benefits to the parties in relation to time, cost and quality. This can perhaps be compared with the JCT approach for similar matters in which the contractor is only obliged to claim for more time and money after the risk event has occurred, which puts the employer in an extremely difficult management position.

2.6 Completion

The JCT form of contract requires a certificate of “practical completion” under clause 2.27.In order to take over part of the works the Employer will require the Contractor’s consent.

Completion under the NEC Option A form of contract is in the form of taking over certificates under clause 35 of the conditions of contract. Unlike the JCT form of Contract the Employer can take over any part of the works prior to completion, if he does however this is a compensation event.

The JCT also requires a final completion certificate when all payments, extensions of time and defects have been finally concluded, the NEC does not provide such a requirement as it is envisaged that all time, cost and quality issues are dealt with contemporaneously.

The NEC4 Option A form of contract has the option under clause X6.1 for the Contractor to be paid a bonus upon early completion. There is no clause under the JCT D & B 2016 form of contract.

2.7 Quality

Both the NEC 4 form of contract and the JCT D & B 2016 form of contract both separate the quality requirements from the conditions of contract in determining the level of quality required.

The fundamental difference that exists between both contracts in terms of quality is that under the NEC 4 Option A contract there is an obligation for both Parties to notify each other of any defects whereas this obligation isn’t found under the JCT D & B 2016 form of contract.

2.8 Dispute Resolution Provisions

In terms of dispute resolution both parties comply with  section 108 of the Housing Grants, construction and Regeneration Act 1996 (HGRCA)  , revised under the Local Democracy, Economic Development and construction Act 2009 (the right to refer a dispute arising under the contract for adjudication)

Adjudication is governed by Option W1 under the NEC Option A form of Contract and clause 9.2 of the JCT D & B 2016 form of contract. A fundamental difference that exists between both contracts with respect to dispute resolution procedures is that under clause 9.1 JCT D & B 2016 form of contract serious consideration is to be given by each party to refer a dispute to mediation first prior to proceeding with Adjudication.

2.9 Termination

Under the JCT D & B 2016 form of contract the Employer does not have the right to terminate at will under this contract whereas under the NEC 4 Option A form of contract Clause 90.2 states that the Employer may terminate for any reason.

2.10 Insolvency

Unlike the JCT D & B 2016 form of contract the NEC Option A form of contract does not require the insolvent party to inform the other of its position, as denoted under JCT D&B 2016 clause 8.5.2, clause 91.1 R8 states that the if a party has had an administration order raised against it either party may terminate.

2.11 Conclusion

  • The NEC applies a more simplistic approach through the use of language
  • The NEC provides a more objective than subjective approach this can be seen in the way in which the NEC deals with weather delays
  • The NEC 4 Option A provides further flexibility in relation to design liability whereby fitness for purpose or reasonable skill and care can be availed of where option X15 can be chosen for incorporate reasonable skill and care;
  • The NEC 4 contract applies a more proactive and collaborative approach to managing the contract rather than a reactive approach, this is illustrated through the contracts approach to programme, variations and risk management.

3 The Impact of only issuing a letter of intent

3.1 Introduction

The purpose of this section is to appraise and assess the impact of issuing a letter of intent and the advantages and disadvantages associated with using a letter of intent.

3.2 Advantages

Letters of intent are generally used in order to facilitate the procurement and commencement of construction works prior to the agreement of a detailed construction contract

In (Cunningham and Others v Collett and Farmers, 2006) Coulson J stated that the circumstances where a Letter of intent may be appropriate to use is

  • Where the scope and price are agreed or there is a clear mechanism for agreement
  • Where the contract terms are (or very likely) to be agreed
  • Where the programme, start and finish dates are broadly agreed; and
  • There are good reasons for starting work in advance of finalising the contract documents.

3.3 Disadvantages

3.3.1 Ambiguity as to whether a letter of intent constitutes a contract and if so to what terms

Traditionally a Letter of intent was regarded as having no contractual effect

Judge Fay stated in the case of (Turriff Construction v Regalia Knitting Mills Ltd, 1971)

A letter of intent is “no more than an expression in writing of a party’s present intention to enter into a contract at a future date. Save in exceptional circumstances it can have no binding effect…. A letter of intent would ordinarily have two characteristics, one, that it will express an intention to enter into a contract in future and two, it will itself create no liability in regard to that future contract”.

This approach was upheld in (Courntney and Fairbairn v Tolaini Bros Hotels Ltd, 1975), (Alldridge (Builders) Ltd v Grandactual, 1995)

However the courts have also adopted, subsequent to the above a different position whereby a letter of intent can in fact constitute a contract.  This was the case in (Mitsui Babcock v John Brown, 1996) where the judge Esyr Lewis QC stated

“My review of the authorities leads me to the conclusion that there is no reason in principle why two parties should not enter into a binding agreement, even though they have agreed that some proposed terms should be the subject of further discussion and later agreement”.

In (British Steel Corporation v Cleveland Bridge, 1984), Lord Justice Goff stated that

“There can be no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement; everything must depend on the circumstances of the particular case.”

Even if a letter of intent is signed by both parties this does not necessarily mean a contract is in place, as illustrated in (Ben Barratt and Son (Brickwork) Ltd v Henry Boot Management Ltd, 1995) where it was concluded that a signature of a letter of intent will signify that the signor agrees to the contents of the letter but does not in itself indicate the letter constitutes a contract.

The Letter of intent itself may also only form part of the contract documents, as illustrated in (Twintec Limited v GSE Building and Civil Engineering Limited, 2002) where a quotation, letter of intent,  acceptance letter and the minutes of a meeting, when put together constituted a contract. A similar case further supporting that Letters of intent, if used should only been used for a temporary period was encapsulated in (ERDC Group Limited v Brunel University , 2006) where five different letters gave rise to a letter of intent where five different letters gave rise to a letter of intent.

Just by placing the words a letter of intent on the document does not necessarily mean it is a letter of intent and could constitute a simple contract (Chappell, 2007), In (Stent Foundations v Carillion Construction (Contracts) Ltd , 2000) , It was held that as all the essential term of a contract had been agreed by the parties a contract came into being even though a formal contract was never signed.

If the letter of intent is therefore not carefully drafted, the Contractor commencing works may create a binding contract for the whole of the works (Chappell, 2007). Even if the term “Subject to Contract is used this does not mean that there is no contract (Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd, 2016), however the letter of intent may also just constitute an agreement to agree and therefore would not be legally enforceable, this was concluded in (Georgi Velichkov Barbudev v Eurocom Cable Management Bulgaria EOOD, 2011).

In can therefore be concluded that whether or not a letter of intent is actually a contract will depend on the circumstances of each particular case leading to confusion and uncertainty in terms of what has actually been agreed.

3.3.2 Price and Payment

Letters of intent are often prepared, considered and executed in haste with inadequate regard to future requirements (Stagg, 2008).Not being used with adequate care and attention by Contractors and Employer’s alike (Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd , 2016).Ambiguity and Uncertainty can often wreak havoc and legal costs can start to mount (King, 2017).

There is potential for the Contractor’s offer to remain open and therefore for them to renegotiate the Contract Price at a later date and therefore result in no cost certainty for the scope to be executed.

There can also be confusion as to how payment is carried out once the letter of intent expires but payments are still to be made, questions often arise as to whether these are to be on a quantum meruit basis or based on the payment provisions contained within the letter of intent, in (ERDC Group Limited v Brunel Univiersity , 2006) the Judge determined that the existing payment provisions within the letter of intent should be used.

Another contentious issue with the use of letters of intent with respect to payment is that there is often a cap placed on them for payment, this can prove problematic if the Contractor decides to stop the works once the cap has been reached.

3.3.3 Liability

 

According to Keating the basic difficulty with such letters “It is a question upon the facts of each case whether the sending of a letter of intent can give rise to any and if any, what, liability “(Furst, 2006)

A letter of intent may convey the intention to enter into a contract in the future but it does not create any liability with regards to that future contract (Ramsey & Stephen Furst, 2017)

A contractor could potentially walk away at any stage and the Employer would not be able to claim delay damages (Chappell, 2007), the letter of intent may not have any binding effect (Ramsey & Stephen Furst, 2017). This occurred in the case of (Ampleforth v Turner and Townsend, 2012) whereby the failure to agree certain terms resulted in the Employer being unable to levy liquidated damages during the currency of the contract, Ampleforth then successfully claimed against their advisors for failing to notify the risks associated with letter of intent.

3.3.4 Disputes

Procedural problems can occur with respect to disputes with the possibility that disputes cannot be resolved through adjudication, this occurred in (Bennett (Electrical) Services Limited v Inviron Limited , 2007) whereby both parties had a difference of opinion as to whether disputed matters could be referred to adjudication due to the uncertain terms contained within the letter of intent.

3.3.5 Changing from Letter of intent to Agreed Construction Contract

There can be uncertainty as to whether the letter of intent takes precedence over an unsigned contract, this occurred in (Spartafield v Penton Group, 2016) where the unsigned contract took precedence, again this led to confusion and subsequently additional legal costs which could have been avoided should the use of a letter of intent have been avoided.

3.3.6 Conclusion

Due to the uncertain nature surrounding letters of intent, as illustrated above it can be concluded that there are no real benefits to be obtained by Percy Land in entering into a letter of intent in replace of a complete contract, whether this be on JCT or NEC terms and conditions. Venti Consultants would therefore advise to put formal contract negotiations first in order to avoid the ambiguity that surrounds letters of intent.

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