CLS Civil Engineering Ltd v WJG Evans and Sons [2024] EWHC 194 (TCC) Letters of intent and caps on liability

A recent judgment of the High Court in England and Wales is a stark reminder of the dangers of commencing works before contract negotiations are concluded.

Background

The case arose of out of the construction of a library, retail provision and three apartments in Narberth, Pembrokeshire. WJG Evans & Sons (WJGE) was engaged by a developer, CLS Civil Engineering Limited (CLS), to carry out the works.

It was common ground that the contract for the works was to be based on the JCT Intermediate Building Contract 2016. However work was commenced under a letter of intent dated 14 August 2021 (the LoI) whilst the parties tried to agree the key terms of the contract.

The terms of the LoI included that:-

“Under no circumstances will [CLS] be liable under this Letter of Intent to pay [WJGE] more than £150,000.00 plus VAT applicable in total”.

On WJGE’s case, at tender stage it had understood that, if successful, it would be engaged under a JCT Intermediate Building Contract 2016 with no contractor’s design and no liquidated damages.

In October 2021 WJGE received documents that provided for liquidated damages and a contractor’s design portion and included a “large schedule of amendments”.

In order to maintain progress on site as negotiations on the terms of the proposed contract continued, the liability cap under the LoI was increased a total of four times, eventually to £1,100,000.

The parties were ultimately unable to agree the contract terms, and CLS wrote to WJGE on 15 February 2023 stating it was unable to award a Contract to WJGE. CLS requested that WJGE demobilise immediately. On the same day, WJGE sent a letter to CLS alleging a repudiatory breach of contract. It subsequently issued a final valuation in the sum of £1,413,669.24.

The proceedings

CLS issued proceedings seeking declarations that:-

1. any legal relationship between the parties was solely governed by the agreed terms set out in the LoI dated 14 August 2021 and its revisions; and
2. CLS’s maximum liability under the LoI and its revisions was £1,100,000.

The primary issue between the parties was whether the £1.1M cap was binding on WJGE. If it was, then it could not recover more than £1.1M.

CLS argued that it was clear on the evidence that the parties never agreed the key terms of the contract, and that the parties’ relationship was governed by the LoI and its revisions.

WJGE argued that, amongst other things, that JCT terms were agreed and that “a contract based on a formal contract that the parties presupposed would be executed” had come into existence.

Decision

CLS was successful, with the Court deciding that JCT terms were never agreed and the parties’ relationship was governed by the terms of the LoI. The £1.1M liability cap applied.

In reaching that conclusion, the Judge undertook an analysis of the communications between the parties, which the Judge noted “show[ed] that the cap was accepted at the time as the works progressed. …[and] there were at least six occasions on which WJGE expressly or impliedly agreed that WJGE were working subject to the cap”.

The “parties discussions in relation to a formal Contract and JCT terms never reached a meeting of minds.”

Carson McDowell view

The case provides a useful reminder of the dangers of commencing work prior to final agreement on the terms under which that work will be carried out.

WJGE found itself unable to recover £300,000.00, a figure which did not include the costs associated with defending the legal proceedings.

It is common on construction and engineering projects for commercial considerations to mean it is in parties’ interests to start work as soon as possible—sometimes before all of the legal, technical and practical aspects of a project are finalised.

For that reason letters of intent are widely used as a means of getting a project moving while negotiations are concluded. Caps on value and end dates are common in letters of intent, and parties are well-advised to be aware of any such terms otherwise they risk unintended consequences.

As has previously been stated by the UK Supreme Court, the “moral of the story is to agree first and to start work later.”

If you would like any further information or advice, please contact Annie Convery from our Construction team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.