14th December 2020
In OD Developments (OD) v Oak Dry Lining Ltd (Oak), the Technology and Construction Court (the TCC) declined to enforce an Adjudicator’s Decision where the Adjudicator had based their decision upon the JCT Sub-Contract terms, and those terms had not effectively been incorporated into the parties’ Letter of Intent.
This case is a reminder of the risks associated with using a letter of intent (LOI), and underlines the importance of agreeing clear contract terms at the outset before starting work.
Oak carried out dry-lining works (the Works) for OD at 19 Bolsover Street, London. OD issued a LOI which included the following wording:
“This Letter of Intent is based on your knowledge and acceptance of the JCT contract stated”
The LOI then referred to the JCT 2011 Design and Build subcontract (the JCT Sub-Contract). However, the parties never actually signed the JCT Sub-Contract nor were any Sub-Contract particulars agreed between the parties.
By way of a reminder, a LOI is a written agreement which forms a contract between the parties that allows works to start before a subsequent contract is agreed, signed and dated at some point in the future (in this case the JCT Sub-Contract). While there is no standard form for a LOI, it will typically limit the scope of works and will cap any monies to be paid. It will usually refer to the type of contract that will ultimately be entered into by the parties (in this case the JCT 2011 Design and Build Contract).
Oak carried out the Works under the LOI, and submitted interim payment applications “more or less” following the mechanism set out in the JCT Sub-Contract. In its interim payments and final account Oak sought payment of £1.711m. OD paid Oak £983,000, leaving a balance of £728,000.
OD issued several pay less notices, claiming that it had overpaid Oak, and was owed £625,000. Oak disputed this, serving its own pay less notice against the final account and claiming £765,000. Oak then referred its claim to adjudication. The Adjudicator found in Oak’s favour, awarding Oak £431,291.81.
OD responded by commencing Part 8 court proceedings, seeking a declaration that the Adjudicator lacked jurisdiction. OD argued that the JCT Sub-Contract applied (despite the parties never actually entering into it). OD asserted that its final payment notice (the Final Payment Notice) had been issued in accordance with the JCT Sub-Contract and was conclusive and binding upon the parties because the Final Payment Notice had not been disputed by Oak within the time period stated in the JCT Sub-Contract. OD argued that given that the Final Payment Notice was conclusive, the Adjudicator had no jurisdiction to hear the dispute.
In response, Oak argued that the JCT Sub-Contract terms did not apply and that the Final Payment Notice was not conclusive.
The Court looked at whether the LOI incorporated the JCT Sub-Contract terms. The Judge said that either the LOI terms applied, or the JCT applied; there was no middle ground where the parties could be bound by both the LOI and the JCT. Based on the wording of the LOI, the Court held that the JCT terms had not been incorporated because none of the contract particulars had been completed, and the JCT Sub-Contract had never been executed. The Judge further commented:
“It is one thing to agree what particular documents you will have if you execute a JCT contract: it is quite another to say that you have, therefore, incorporated all those JCT terms and conditions at the outset and at the same time.”
The Court also held that the Adjudicator had been appointed properly because Oak’s notice of adjudication (the Notice of Adjudication) was consistent with an express adjudication provision within the LOI (which referred to adjudication being conducted under the statutory Scheme and the Adjudicator being nominated by the Royal Institute of Chartered Surveyors). It did not matter that the Notice of Adjudication did not expressly refer to this provision in the LOI.
It was held that OD’s assertions that the Final Payment Notice was valid and conclusive did not by themselves deprive the Adjudicator of jurisdiction. As the Judge observed:
“It cannot be right that a mere claim by one party to be able to rely on a conclusivity provision is sufficient to deprive the adjudicator of adjudication at the outset. Otherwise these kind of not uncommon disputes would never go to adjudication at all. That is clearly an absurdity.”
As the LOI did not incorporate the JCT Sub-Contract terms, Oak’s account was required to be valued in accordance with the valuation mechanism under the LOI, not the JCT Sub-Contract terms. Unfortunately for Oak, the Adjudicator had valued its account on the basis that the JCT Sub-Contract terms applied. The Court held that Oak’s works should have been valued on a quantum meruit basis. The Adjudicator therefore did not have jurisdiction to make the Decision on the basis that the JCT Sub-Contract terms applied and the Adjudicator’s Decision could not be enforced.
LOIs are commonly used within the construction industry, where contracts can be long, highly technical and can take time to agree. There are often commercial pressures that mean a LOI is utilised to allow works to commence sooner rather than later. It is also a reality that some parties may never actually enter into the main contract referred to in the LOI, whether due to oversight or otherwise.
It is therefore imperative that the terms of the LOI are clear and that the parties understand exactly what is included under the terms of the LOI. In particular, parties need to carefully consider what terms apply when commencing an adjudication – whether it is the terms of the LOI, or the terms of the form of contract referred to within the LOI. Errors here can result in unnecessary legal costs and wasted time in pursuing an adjudication which may not be enforceable.
This case is a stark reminder of the risks of using LOIs, and the consequences that can befall the parties if they fail to make clear what terms are intended to apply.