29 January 2007
The recent decision of the English Court of Appeal in the case of Skanska Rashleigh Weatherfoil Limited v Somerfield Stores Limited illustrates, again, the dangers of allowing works or services to commence before the parties have concluded the detailed provisions of the contract which are to govern their relationship.
Employers of contractors often believe it is commercially expedient to allow contractors to commence works when negotiations of the provisions of the contract which is to govern their relationship have become bogged down. One means is to use a "Letter of Intent" which is intended to govern the short term relationship between the parties pending the conclusion of the detailed provisions of the final contract.
There are, however, many instances where the use of letters of intent has given rise to disputes, in particular in situations where the parties have been unable to conclude the provisions of a contract after works have commenced. It is clear from these disputes that parties often have very different intentions as to the meaning and effect of the provisions of a letter of intent.
In the Skanska case, a letter of intent was prepared which included a temporary arrangement for the provision of facilities management services by Skanska to Somerfield supermarket stores in the UK.
Somerfield had originally invited Skanska to submit a tender for the provision of facilities management services for a 3 year period. At the time of inviting the tender, Somerfield had already prepared a draft contract (known as the "Facilities Management Agreement" (FMA)) which was attached to Somerfield's letter of invitation to tender.
Negotiations were held concerning the terms of the FMA but after several months, the parties had been unable to agree all of the terms and conditions which were to govern the relationship between them for the 3 year period.
Somerfield, however, wanted the facilities management services to commence immediately and, to govern the intervening period before all of the provisions of the FMA could be agreed, it sent a letter of intent to Skanska for the "Initial Period".
The letter of intent contained the following:
A statement that the provisions of the letter of intent were "subject to contract".
A provision which stated that while the parties continued their negotiations of the provision of the FMA, Skanska were to "provide the Services under the terms of the Contract from 28 August 2000 ... until 27 October 2000 ...".
- A statement that no commitment from either of the parties relating to the provision of the Services, "subject to the remaining provisions of this letter", was to arise until they had both signed the FMA.
Notwithstanding the conduct of further negotiations, the parties failed to conclude the provisions of the FMA and a dispute arose between the parties when Skanska sought to enforce certain provisions contained in the FMA.
Even though the letter of intent provided that the arrangement was "subject to contract", both parties subsequently accepted that a contract was concluded in respect of the provision of the "Services" during the initial period. The dispute, however, centred around the provisions which were incorporated into the contract for the Initial Period and which provisions of the FMA applied.
The Judge at first instance accepted Skanska's argument that only the terms of the FMA which where necessary to define the Services to be provided were incorporated into the contract created by the letter of intent.
The Court of Appeal, however, overturned the Judge's decision and held that the parties had intended that all of the provisions of the FMA were to apply to the "temporary" contract for the initial period.
The court held that the words "you will provide the Services under the terms of the Contract ..." should be given their natural meaning and that it was intended by the parties that the Services to be provided during the initial period were to be governed by the FMA. This interpretation was assisted by the fact that the Services were of a complex nature (consisting of over 300 different types of operation) and it was held that it was more likely than not that the parties intended that the detailed provisions of the FMA were to apply.
In reaching this decision the Court of Appeal made the following observations:
The courts must be careful in departing from the natural meaning of a provision used in a contract merely because it may conflict with the court's own notions of commercial common sense of what the parties may, must or should have thought or intended. Judges are not always the most commercially minded or the most commercially experienced people and should avoid assuming the role of arbiter of commercial reasonableness or likelihood.
The surrounding circumstances and commercial common sense do not provide the courts with a licence to rewrite a contract merely because its terms seem unexpected, unreasonable or not commercially very wise.
- The contract concluded by the parties will incorporate the words which the parties have chosen to use in order to identify their contractual rights and obligations, as they have control over the words they use and what they agree.
The decision in Skanska demonstrates again the importance of parties concluding full and detailed provisions of the contract which is to govern their relationship prior to works or services being commenced.
If this, for whatever reason, is not possible, then great care needs to be taken in the use of letters of intent which are intended to govern the contractual relationship between the parties prior to conclusion of a detailed contract. The fact that the term "subject to contract" is used in a letter of intent does not necessarily mean that a binding contractual relationship cannot be created.
Letters of intent therefore have to be well drafted and precise to make it clear what the parties' respective contractual positions are if they are unable to conclude a detailed agreement. A failure to ensure this will often result in disputes arising which can only be resolved by litigation. As with all disputes relating to matters of contractual interpretation, this can have uncertain and costly results.
Letters Of Intent - Duties Of Consultants When Advising Their Use (26 Mar 2007)
Letters Of Intent - A Potential Minefield? (6 Apr 2005)
For further information, please contact:
Name: Kevin R. Owen
Phone: +852 2843 4408
Fax: +852 2103 507