Letters of intent can be accompanied by considerable uncertainty as to the extent of the parties' respective obligations or as to whether there is a contract at all. Such matters arose in the case of Diamond Build Limited -v-Clapham Park Homes, which concerned the issue of whether a contract contained in a letter of intent had evolved into a standard form of contract.
Letter of intent
Clapham accepted Diamond's tender and issued a letter of intent, which Diamond signed and accepted. The letter of intent stated that the parties would enter into a JCT Intermediate Form of Building Contract and that the undertakings in the letter would be extinguished upon the execution of the formal contract. The specification also stated that the contract was to be executed as a deed. The letter also contained a cap of ВЈ250,000 on any reimbursement that Diamond would receive in the event that a formal contract was not executed.
In October 2007, Clapham issued the contract documents to Diamond for signature, but Diamond did not sign and return them.
Work progressed from July 2007 and Diamond placed orders with subcontractors to a value of about ВЈ1.5m. Diamond made monthly applications and claims for extensions of time, and Clapham issued interim certificates and instructed variations. In November 2007, owing to delays, poor workmanship and a general deterioration in the relationship, Clapham, relying on the provisions of the letter of intent, terminated the contract. Diamond responded by stating that, owing to the issue of the contract documents for signature, things had moved on since the issue of the letter of intent and that a contract existed based upon the JCT Intermediate Form. Additionally, Diamond stated that the cap was no longer applicable as Clapham had issued instructions and had been involved in placing orders with a specialist window contractor.
Standard form of contract
Diamond sought a declaration that by the time its relationship with Clapham had been terminated, a standard form of contract existed between them. The question to be determined was whether the letter of intent had been superseded by a JCT Intermediate Form, preventing Clapham from relying on the cap on its liability.
Diamond argued: (i) its acceptance of the letter of intent did not create a contract (ii) even if the letter of intent created a contract, once the parties were in the position to execute a formal contract (which Diamond considered to have occurred upon the issue of the contract documents), the letter of intent lapsed in favour of the intended contract (iii) the cap on Clapham's liability was unfair as the limit would be quickly exceeded.
In relation to the issues, the judge decided: (i) the letter of intent created a simple contract, as it had sufficient certainty: there was a commencement and completion date, a requirement to proceed regularly and diligently, an overall contract sum and an undertaking to pay reasonable costs in the interim (ii) the contract in the letter of intent had not evolved into a standard form of contract, as the stipulation in the letter of intent and specification requiring the execution of a formal contract as a deed had not been complied with. The judge stated that by accepting the letter of intent, the parties accepted that the terms of that letter governed the rights and obligations of their relationship until the formal contract was signed, allowing Clapham to rely on the cap (iii) the cap related only to work that was the subject matter of the tender. The judge stated if additional or different work was ordered by Clapham to be done by Diamond, that it would attract payment in addition to and above the cap on a quantum meruit basis.
In summary, if the creation of a formal contract is conditional upon compliance with a particular stipulation, no enforceable contract will exist until that stipulation has been fulfilled. In this case, the formal execution of the contract as a deed was required to create a contract on the JCT terms under the letter of intent.
Additionally, to a limited extent, the cap in this case could be avoided where Diamond undertook work that was additional to or different from the tendered requirements.