20 November 2012

Letters of intent and the duties of Project Managers

In a recent decision, the Technology & Construction Court ordered a project manager to pay damages to the employer where a contract proceeded through a series of letters of intent. In the case of The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited, the Court found that the project manager had breached their duty of care to the employer by, amongst other things, failing to take adequate steps to procure the execution of a building contract.

Turner & Townsend had been engaged by Ampleforth to act as the project manager in respect of the construction of a new boarding house at Ampleforth College. Kier Regional Limited was the building contractor, and was initially engaged under a letter of intent while certain design changes to the project were implemented. The letter of intent was drafted by the project manager. It contained reference to an intention to enter into a formal building contract in due course, but the terms of that building contract were stated to not bind the parties until it was formally executed. The building contract was not ultimately entered into, and by the time the building works were completed, the parties had entered into 8 letters of intent.

A dispute arose between the employer and the building contractor, and the employer claimed that they were entitled to liquidated damages for delay on the basis that the works had been completed late. The building contractor denied that they were liable for liquidated damages for delay, and relied upon the fact that no building contract (containing a liquidated damages provision) had been executed. The dispute was settled following a mediation and the employer then commenced professional negligence proceedings against the project manager. It argued that had Turner and Townsend procured the execution of a signed building contract, then Kier would have been liable for liquidated damages for delay and Ampleforth would have achieved a better settlement. It claimed damages in respect of the shortfall.

The Court found that although the project manager had not been under an absolute obligation to procure the execution of a building contract, their failure to do so nonetheless suggested “that something went wrong with the project”. The judge held that the project manager had “failed to take the steps reasonably required of a competent project manager for the purpose of finalising the contract”. The issuing of the various letters of intent led the Judge to conclude that the project manager had “effectively treated the contract as a dispensable luxury”.

The Judge was satisfied that the project manager had breached its duty of care to the employer, and the fact that the project manager may have misunderstood the effect of the letters of intent was no defence. The Court acknowledged that while there had been a risk that Kier might not have ultimately entered into a building contract, it thought that there was a “two thirds chance” that it would have signed a building contract containing liquidated damages provisions, and awarded Ampleforth £225,667.00 in damages. The project manager was not allowed to rely upon a limitation of liability clause which had been contained in its appointment document. This was found to be unreasonable and therefore in contravention of the Unfair Contract Terms Act 1977. In reaching this conclusion, the Judge noted that the project manager’s appointment document required it to maintain professional indemnity insurance of £10million, and it was unreasonable in these circumstances to rely on a cap on liability of just £111,321.00.

Whilst this decision has been criticised, potentially it has important implications for the role of the project manager, and limits of liability in their terms of appointment, and may lead to an increased number of claims being made. It also reinforces the importance of ensuring that contracts are concluded, and that letters of intent adequately reflect the client’s requirements. This case does not, of course, mean that letters of intent will not be appropriate for particular projects, but they should be kept under review.

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About the Author
Adam Finch, Partner
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