You may recall a previous article in Construct that dealt with the risks of commencing construction works pursuant to a letter of intent (“LOI”). OD Developments v Oak Dry Lining Ltd [2020] EWHC 2854 (TCC) demonstrates those risks and also provides a rare example where the Court did not enforce an adjudication decision on jurisdictional grounds.
Facts
Oak Dry Lining (“Oak”) were engaged by OD Developments (“OD”) as a dry lining sub-contractor to carry out works at OD’s project.
The parties commenced works under a LOI. They had intended to execute a JCT contract which would then be the document governing their relationship. Our previous article highlighted the need to ensure the parties execute the JCT Contract as envisaged to ensure you incorporate all the necessary terms. The JCT contract was subsequently not entered into and the works were completed under the terms of the LOI.
A dispute arose regarding the final payment notice. Oak referred the matter to adjudication which was the prescribed method of dispute resolution within the LOI. OD had claimed in its final payment notice that it was due £625,000. Oak submitted that in fact it was OD who owed Oak £765,000.
OD disputed the adjudicator’s jurisdiction but was unsuccessful in doing such. The adjudicator found that the JCT terms had been incorporated into the letter of intent and made his valuation in accordance with the terms of the JCT Contract. The adjudicator found in favour of Oak and OD were ordered to pay £431,000.00.
After the adjudication decision, OD issued Part 8 proceedings claiming the adjudicator did not have jurisdiction to decide the dispute. It argued that the adjudicator's appointment was invalid as it did not comply with the adjudication provision in the LOI (which OD alleged included the JCT contract terms). OD further claimed its final payment notice itself was conclusive and thus there was no dispute at all.
Oak made an application for summary judgment to enforce the adjudicator's decision. It argued that the contract did not incorporate the JCT terms, and their actions were governed by the LOI and the adjudicator was validly appointed following the provisions within the LOI. Alternatively, if the JCT terms were incorporated, then the final payment notice was non-compliant with the JCT payment provisions and was invalid. As the final payment notice was non-compliant, this would mean that Oak's default payment notice was valid and conclusive, meaning that Oak was in fact owed £765,000 by OD.
Judgment
Judge Waksman determined that the LOI did not incorporate the JCT contract terms. The judge stated that either the LOI operated independently or the JCT contract was executed by the parties. The judge held that adjudicator had been appointed properly because the LOI referred to adjudications being conducted under the statutory Scheme and named the RICS as the nominating body. Those provisions were the same in the JCT contract. Oak's notice of adjudication therefore complied with the adjudication provision in the LOI.
The judge’s finding that the LOI operated independently meant that the adjudicator should have valued the works on a “fair and reasonable” basis rather than in accordance with the JCT contract. The judge therefore refused Oak’s application for summary judgment as the adjudicator had acted outside of their jurisdiction by valuing the works using the JCT method and not that of the LOI and his decision was unenforceable.
Commentary
OD Developments highlights some important practical points when considering using, or working under, a LOI.
Firstly, LOIs should be drafted carefully. The person drafting the LOI should consider whether the LOI acts as a standalone document which envisages execution of the main contract later or whether it incorporates terms from a standard form contract. If the former, the drafter should ensure the key terms, such as payment and dispute resolution, are included. In any case the provisions of the Housing Grants, Construction and Regeneration Act 1996 (as amended) and the Scheme for Construction Contracts 1998 (as amended) may apply.
Secondly, if the LOI envisages execution of the main contract later, the parties should endeavour to execute that contract. A LOI will not offer the same protections and rights as a detailed construction contract.
Thirdly, if a dispute arises in a LOI situation and the potential referring party is unsure of what terms apply, it could consider commencing an adjudication to determine that dispute before proceeding with a payment claim. This two-stage approach is not ideal however and further demonstrates the uncertainty of working under a LOI.
If you require advice regarding using or working under a letter of intent, please contact the Construction and Development team at Prettys.
