‘Maximum amount payable’ clause tested under a letter of intent – CLS Civil Engineering v WJG Evans (2024)
Commencing works under a ‘letter of intent’ is not uncommon in the construction industry.? Those doing business in this way need to be careful when it comes to clauses that cap the total amount payable under the letter of intent.? These clauses are extremely common!
For example, the clause might look like this:
“Under no circumstances will we be liable under this Letter of Intent to pay you more than ￡150,000 plus VAT applicable in total.
The exact wording above was examined by the court in the recent case of CLS Civil Engineering Limited v WJG Evans and Sons [2024] EWHC 194 (TCC).
In short, the court decided that this wording above was enforceable.? Therefore, the building contractor was not able to recover amounts in excess of the cap! ?The building contractor exceeded the cap at its own risk.
Facts of the Case
I have bulletpointed out the key facts for ease of reference:
A harsh result?
At first blush, it might seem ‘harsh’ for a developer to enforce a cap of ￡1.1m, when the value of work delivered on the site was ￡1.4m (according to the contractor’s claims consultant).?
However, when the facts of this case are carefully considered, this is not the case.
In short, the correspondence clearly showed that the contractor was acutely aware of the cap and was working to it.? The extracts below clearly demonstrate this – I have highlighted the key elements in bold:
WJGE email dated 4 July 2022
“I note our most recent valuation No 9... was in the sum of ￡511,027.99 net. Since the date of this Valuation up until today's date a considerable amount of work has been completed... In total this now exceeds the current LOI limit of ￡500K... Whilst waiting for the "Official Contract" to be issued for review and signing as promised in the last progress meeting and in order to maintain momentum and progress on site I request this be reviewed and increased today without delay - I trust you will give this your immediate courtesy”
WJGE email dated 4 July 2022
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“… in order to maintain momentum and progress on site I confirm receipt and accept your increased capped order value in the sum ￡800,000 plus VAT as described in your e-mail below and will therefore continue to work to our best endeavours up to this limit based on the contract particulars, standard JCT Intermediate Contract with no L&A damages applied as originally tendered against. If this is not acceptable then please inform me immediately."
WJGE email 18 October 2022
“As you are aware we have still not received an official JCT intermediate contract and we again find ourselves operating beyond the scope of the ￡800,000.00 LOI/order value which is unacceptable… The advice previously given, as noted in my e-mail 4/7 (below) was that we should not exceed the current LOI value in any circumstances whatsoever and should we find ourselves in a position where we find ourselves exceeding then I (WJGE) have an obligation to officially write to you both to inform you of the situation that all work should stop with immediate effect until a new LOI/ increased order value be issued.”
WJGE email 2 February 2023
“The advice previously given remains... we should not exceed in any circumstance, the current LOI order value… I therefore officially write to you all this morning… informing you of this situation and request that you give this your immediate attention as we're now all running at risk and the implications for us all could be catastrophic!"
The wording of the letter of intent was clear.? It was understood by the contractor.? As such, I think the courts decision that the cap was enforceable, was inevitable.? The courts have no interest in rescuing parties from a bad deal.
Estoppel?
An argument put forward by WJGE was that CLS should be estopped from contending that there was a liability cap “in circumstances where it has paid sums in excess of any liability cap in the LOI…”.
In layman’s terms, WJGE was arguing that the liability cap should not be applied because CLS had previously ignored it.
The court decided that this argument had no merit.? In the first instance, the court held that there was no evidence that CLS had ever paid monies in excess of the cap.? In any event, the court held that CLS could not be estopped from relying upon the liability cap in circumstances where WJGE had repeatedly agreed to it and relied upon it when seeking an increase in the cap (see the emails from WJGE above on this front).
In other words, WJGE’s estoppel argument just didn’t stand up to basic scrutiny.
Take aways
The message from this case is simple – if you have received a letter of intent, read it carefully.? If it contains a clause which limits the maximum amount payable, do NOT exceed this limit without express agreement well in advance.? Do NOT exceed the cap under any other circumstances.
We regularly review letters of intent for our clients.? Maximum amount payable clauses are only one of red flags we look out for!
If you have any questions on this article, feel free to drop me an email – [email protected].
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???? Perfection? Purification of gyri? You have it! Founder of FIDIC, JCT, VOB, AIA ... Bespoke Contracts Forum 2015 & TEA Group 2018
8 个月Letter of Intent, as such, serves as information of intent only. Nothing more, nothing less. Letter of intent is based on received tender documentation. Usually contents a few points which can further be discussed between Bidder and the Client. That means that the bidder may agree, suggest or decline client's proposal. There is much more to be done till achievable and signed agreement ...
The cap is to allow works to proceed whilst the last remaining terms of the Contract for the whole of the Works are finalised and agreed. The intention is that the Main Contract is in place before the limit has been exceeded and that the contract formed based on the LOA is subsumed into the Main Contract for the whole of the Works. This has clearly not been the case here and the cost of complacency has been high. In at least 90% of cases, there should be no need for a LOA.
Director at Closebrook Properties.
9 个月Well intentioned but naive. The simple answer is when you reach the cap, down tools til it's increased.
Industrial Floor Refurbishment Expert | Project Director @ BECOSAN? UK Ltd
9 个月Very interesting and informative. It would seem, without all knowledge of the matter that there may have been an element of bad faith in the matter.
Project Manager at Alpine Racing Ltd
9 个月Nice article William, thanks for sharing. Although interesting choice of words in the final paragraph - "this is just one of the red flags we look for in LoI's" - to me its 100% a green flag! LoI's should not be used instead of a contract! Issue the contract terms with the tender then either agree it and sign it or don't agree it and move on! LoI's can be useful but they are risky longer term.