Financial limits in letters of intent are used to protect the client – because they rarely include a fixed price and are relying on ‘reasonable costs’ – and as an incentive for the contractor to sign the full contract.
These limits on the client’s liability to pay for works are rarely effective in either of these goals – as both my peer-reviewed (IJLBE) paper and my Society for Construction Law paper argued.
Whether they are effective to limit the amount payable is arguable, as caps have been overriden by court decisions based on:
- a supplemental verbal contract for extra works with an implied duty to pay a reasonable sum for those works (so the limit in the letter of intent only applied to works instructed under it)
- the client waiving the limit by its actions after the letter of intent was sent
- the parties jointly agreeing that the letter of intent would continue to cover more works and that therefore the limit would no longer apply
- the client being estopped (an English law equitable remedy) from relying on the limit as it had impliedly promised to pay
- the contractor being awarded payment on the basis of unjust enrichment (an English law equitable remedy where there is no contract) – as the client had instructed works and taken the benefit of them, it would be unjust for it to be enriched by those works without paying for them…
Sticking to the limit
There have been a handful of cases in the English courts where the limit was upheld and the most famous was Mowlem v Stena (2004). This case involved a whopping 14 letters of intent, with a final cap on the client’s liability to pay of £10m.
The final letter of intent said:
You will be paid… such reasonable amounts as can be substantiated in respect of your costs for orders placed or work done, subject to the maximum amount given below.
In the event that this letter of intent is rescinded and the Contract is not awarded to you, [the client’s] total obligation to [the project team] will be limited to a maximum of £10,000,000.
Emails after this letter was sent confirmed that ‘the amount of £10m is the limit’ whilst also suggesting that there was a contract for the whole of the works, which would cost more than this sum… The court said that the letter was clear on this maximum and that ‘it would make no commercial sense to have a financial limit on [the client’s] obligations to make payment which could be avoided by the simple expedient of continuing to carry out work. It would be event more bizarre commercially if the financial limit on [the client’s] obligations could be avoided simply by [the contractor] exceeding the limit.’
More recently, CLS Civil v WJG Evans (2024) also upheld a limit in the letter of intent. The chronology of their attempts to agree a full contract is essentially a game of contract ping-pong, but just looking at the client’s attempts to limit it’s liability to pay the contractor is intriguing.
The letter of intent said:
Under no circumstances will we be liable under this Letter of Intent to pay you more than [£X] plus vat applicable in total.
The tendered contract sum was £910,000 plus vat. The limits inserted in the letters of intent (£X in the sample wording) were:
- Letter 1, 16 August: Limit £150,000
- Letter 2, 19 November: Limit £300,00
- Letter 3, 15 March: Limit £500,000
- Status 4 July: Contractor notified that valuation was over this limit and more work has been completed; Client emailed to ask all works to stop with immediate effect
- Letter 4, 4 July: Limit £800,000
- Letter 5, 18 October: Limit £1,100,000
- Status 2 February: Payment application exceeds limit. No contract signed.
The contract administrator recognised after the final letter that everyone is now operating at risk. Within days the contract administrator confirms that it believes ‘there will never be any resolution to the fundamental issues as to the contract sum and liquidated damages‘ and that the client will be ‘unable to award a contract‘ for the works.
The contractor issues a final valuation for £1.413m. It agrees that the limit was finally set at £1.1m, but seeks to overturn that limit.
The court held that the limit did apply for these reasons:
- the contractor admitted it (in evidence)
- each limit was accepted by the contractor’s conduct in progressing the works
- the contractor expressly or impliedly agreed it was working subject to a limit on at least six occasions
- the contract between the parties was based on the letters of intent not on any pre-contract correspondence.
What should you do?
Letters of intent should be used wisely (ie understanding all the risks) and sparingly (for short periods and discrete works).
Many users don’t fully understand their risks.
The most critical risk is that the full contract is not signed – leaving the contractor without a contract for all of the works, and the client with an obligation to pay which can be uncertain.
If you work under a letter of intent, be aware of the risks and don’t assume the courts will take sympathy on you if the full contract is never signed.
You can find out more in my book on letters of intent, which also covers how to write a better letter and the risks of using one.
Sources: Mowlem Plc (t/a Mowlem Marine) v Stena Line Ports Ltd [2004] EWHC 2206 and CLS Civil Engineering Ltd v WJG Evans and Sons [2024] EWHC 194
Related posts: what you need to know about letters of intent and A to Z of letters of intent.
