BuildLaw, Issue 18 Editorial

John Green Welcome to the September 2013 Issue of BuildLaw®. 
 
In this issue we bring you a wide range of contributions written by leading construction lawyers, academics and prominent dispute resolution professionals from various jurisdictions around the world.
 

Adjudication Unplugged

 
The recent round of submissions to the Select Committee in relation to the Construction Contracts Amendment Bill further demonstrates that there is a general lack of knowledge and a lack of understanding of the workings of adjudication under the Construction Contracts Act 2002.
 
That is not altogether surprising however given the relatively small number of adjudications undertaken each year.
 
Well it’s time that those myths, mysteries and misconceptions were unceremoniously debunked.
 
BDT collects and analyses extensive statistics in relation to each adjudication undertaken by its adjudicators. The statistics have remained reasonably constant over the past five years and plainly speak for themselves about the efficacy of adjudication.
 

Letters of Intent


In a perfect world, parties to a construction contracts would finalise all aspects of their deal and record it fully in a formal, signed agreement before any work was performed or costs incurred. Most construction projects are subject to commercial pressures and tight timeframes for completion and therefore it is not uncommon for a contractor to make an early start and commence work on the basis of a letter of intent before a formal contract has actually been concluded.
 
The use of a letter of intent can be advantageous as it can allow the parties to get a head start on the construction programme in a number of useful ways, allowing them to begin the design or construction process and let supply contracts and subcontracts particularly in respect of long lead-time items.
 
Despite the clear benefit of being able to get the project underway earlier there are significant risks attached to commencing a project under such an arrangement. The dangers of doing so are legendary and lawyers will almost certainly caution against the use of letters of intent.
 
However, letters of intent are widely used in the construction industry and while the risks associated with using them are well known, there are good practical reasons for their use so work is not delayed while the building contract is being negotiated just so long as they are used only for their temporary specific intended purpose and a formal contract is executed as soon as possible thereafter.
 
Two recent UK cases highlight the danger of using letters of intent, carrying out the works, and then not resolving key terms that can lead to uncertainty and prolonged disputes.
 
In Merit Process Engineering (HY) Ltd vs Balfour Beatty Engineering Services (HY) Ltd [2012] EWHC 1376 (TCC), Mr Justice Edwards-Stuart held that the parties had not reached an agreement on price and therefore the terms of the subcontract were not finalised and were not binding on the parties including the right to refer disputes to arbitration.
 
Merit was engaged by Balfour Beatty to carry out subcontract works under a letter of intent in early 2004 on the understanding that they would subsequently enter into a contract which would include among things, an arbitration clause. The letter of intent provided that works could be carried out by Merit up to a certain value and was expressed to be "subject to contract" and did not include an arbitration clause.
 
Balfour Beatty and Merit commenced, but did not finalise, negotiations as to the terms of the subcontract, including a price for the works. The final exchange of letters indicated that the parties had not agreed the contract price although they appeared to be only £37,500 apart for works worth approximately £1.6 million.
 
A draft form of subcontract, which included an arbitration agreement, was sent by Balfour Beatty to Merit, however it was never signed and a final form of contract was never entered into.
 
Merit commenced proceedings against Balfour Beatty in relation to the work which it had carried out. Balfour Beatty sought to rely on the arbitration clause in the draft contract and applied to stay Merit's proceedings. It argued that the terms of the subcontract had been sufficiently finalised so that there was an arbitration agreement between the parties and therefore any dispute between the parties should be referred to arbitration in accordance with the subcontract.
 
The Court of Appeal concluded that no agreement had been reached on price and no mechanism had been agreed by the parties to arrive at a "fair" price. The Court held that while the amount in dispute might not seem substantial for works worth approximately £1.6 million, it was not de minimis or non-essential and therefore the terms of the subcontract were not finalised and were not binding on the parties including the right to refer disputes to arbitration. The work was still being carried out under the terms of the letter of intent.
 
In ‘Letters of Intent, professional negligence and standard terms’, Andrew Jones of SNR Denton discusses the recent case of The Trustees of Ampleforth Abbey Trust v. Turner & Townsend Project Management Ltd [2012] EWHC 2137 (TCC) which illustrates the limited protection offered by letters of intent and that parties using them should ensure the building contract is executed as soon as possible. The case demonstrates that the continued use of letters of intent is a poor substitute for a carefully negotiated and comprehensive construction contract and losing focus on finalising the building contract once work has started could be a costly mistake should issues arise on the project.
 
As Judge Keyser QC stated, Building contracts are "precise, detailed and structured documents that define the rights, duties and remedies of the parties" and Letters of Intent are "contracts of a skeletal nature whose classic use is for restricted purposes that do not protect the employer's interests in the same manner as would the formal contract."
 
After reading this article, Project Managers in particular will be acutely aware of the importance of ensuring that the building contract is put in place. For the first time, the Court has found a Project Manager liable for professional negligence for failing to take sufficient steps to have a building contract executed.

Editorial Part 2 - Click here to continue reading
 

 
 

 

An Authorised Nominating Authority
under section 65 of the Construction Contracts Act 2002