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Australia – The Indispensable Luxury Of Contract And The Project Manager Who Misunderstood.

4 April, 2013

 

WHAT YOU NEED TO KNOW

 

  • The recent case of The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited considered, among other things, the duties of a project manager to procure execution of a contract and advise on the risks of working under letters of intent.

 

WHAT YOU NEED TO DO

 

  • Project managers need to be aware of the risks of using letters of intent and bring these risks to the attention of the principal where a letter of intent is proposed. If the project manager is not capable of providing this advice the project manager should encourage the principal to seek legal advice.
  • Project managers charged with procuring the award of a building contract should take all reasonable steps to ensure the contract is executed as quickly as possible. To avoid the risk of liability in negligence, affirmative action to bring the contract to a close will be necessary. This may include the development of an “action list” of the obstacles that need to be addressed before contract completion and negotiations at a senior level if necessary.

 

Facts

 

In The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137, the English High Court relevantly considered whether the failure of the project manager, Turner and Townsend Project Management Limited (TTPM) to procure an executed building contract from Kier Regional Limited (Kier) and the failure to provide advice about the risks of continuing to issue letters of intent was a breach of its duty of care to the Trust.

 

The Trust engaged TTPM as project manager on a building project for the construction of student accommodation. Kier was engaged as the building contractor for the project and works commenced on site in December 2003. Due to a pressing time for completion, work commenced under a letter of intent, with contractual negotiations still underway. The execution of the contract was, however, continually delayed and the Trust issued numerous letters of intent recommended and prepared by TTPM. Each letter of intent covered more of the works and the eighth letter issued in September 2004, covered the entirety of the project. Each of the letters of intent envisaged that a formal contract based on JCT 1998 Standard Form of Building Contract With Contractor’s Design would be executed and this would supersede the letter of intent. The proposed JCT terms were attached to the first letter of intent and included liquidated damages of £50,000 per week. However, the letter of intent expressly excluded the applicability of the JCT terms until the formal contract was executed.

 

The work was completed significantly behind schedule. The Trust sought liquidated damages from Kier in the sum of £750,000. However, this claim was settled in mediation without payment as the letters of intent prevented the Trust from relying on the JCT terms.

 

The Trust brought a claim against TTPM for breach of its duty of care as a project manager. The Trust argued that TTPM should have taken resolute action to procure Kier’s execution of the contract by taking positive action to remove specific obstacles; identifying all outstanding matters and maintaining constant pressure on Kier to address them; bringing commercial pressure to bear on Kier at a senior level; threatening to withhold payment until Kier had dealt with the outstanding matters; and threatening not to issue further letters of intent.

 

The Trust also argued that TTPM should have advised it of the limited protection under letters of intent as compared with an executed contract, particularly in respect of availability of liquidated damages, liability for design defects, and the increasing risk that the repeated issue of letters of intent would make it less likely that Kier would execute the contract.

 

The Trust alleged that had TTPM acted with reasonable care and skill, it would have procured Kier’s execution of the contract, and the Trust would have been in a more favourable position with respect to liquidated damages for Kier’s delay.

 

Decision

 

The Court held that TTPM did breach its duty of care to the Trust. The Court found that if TTPM had provided the Trust with proper advice, the Trust would have followed the advice and pursued execution of the contract. If the Trust had acted in this manner, there was a “real and substantial chance” that Kier would have signed the contract, inclusive of the liquidated damages provision. The Court awarded damages to the Trust in the sum of £226,667 based on loss of the chance that Kier would have signed such a contract.

 

Failure to procure the building contract With respect to the failure to procure the building contract, the Court recognised that, whilst a project manager’s role depends on the facts of the case and the terms of engagement, a central part of the role is as coordinator and guardian of the principal’s interests.

 

The scope of TTPM’s duties included the facilitation of the procurement of a building contract. The Court observed that although TTPM was not under an absolute obligation to ensure the contract was executed, TTPM did have a duty to exercise reasonable care and skill to ensure that Kier executed the contract. In deciding whether TTPM had been negligent, TTPM’s actions had to be judged by the standard of the ordinary skilled man exercising and professing to have a special skill in project management.

 

TTPM had taken steps toward the execution of the contract, leading negotiations with Kier, holding monthly progress meetings with Kier and the Trust to discuss the outstanding issues, corresponding with Kier, summarising the position regarding the contract negotiations and requesting further information. However, the Court held that these steps were not sufficient to discharge the duties of the project manager.

 

The Court noted that TTPM treated the contract as a “dispensable luxury”, TTPM’s efforts “…entirely lacked focus and any sense of necessity. Correspondence, emails and discussions abounded, but they provided little incentive for the resolution of the matter when [TTPM] continued to see further letters of intent as an acceptable pressure-valve.”

 

The Court criticised TTPM’s failure to “…focus on the matters that remained outstanding before a contract could be signed, to work urgently to resolve those matters one by one, to advise the Trust of the need to ensure that a contract was signed, and to bring proper pressure to bear on Kier and on the situation generally to that end. That pressure would include letting it be known that, possibly, the third letter of intent … or …a subsequent one for a short period would be the last and that the contract would have to be executed thereafter.” The Court considered this should be accompanied by the identification of outstanding matters and “urgent and concentrated efforts” to address those matters.

 

The Court declined to prescribe all of the things that TTPM should have done to bring the contract to a close but recognised that the “…first thing to do was to identify the things required to be done, how they were to be done, and within what timescale they were to be done…A deadline and an action list would also require the relevant parties to hold such meetings as were necessary in order to thrash out the problems. This would have involved direct communication at director level, if that had proved necessary.”

 

Failure to provide advice about the risks of continuing to use letters of intent

In respect of the failure to provide advice about the risks of continuing to use letters of intent, the Court recognised the value of letters of intent in getting works started on site but it was critical of the lack of advice provided by TTPM about the risks of their ongoing use. The Court noted that no advice was given that, once the works had sufficiently commenced, it was not appropriate to continue issuing letters of intent, and that the proper course was to insist on a contract. The Court also noted the absence of advice to the effect that the longer the works continued under letters of intent, the lesser the incentive for Kier to execute the contract.

 

TTPM had mistakenly believed that liquidated damages would be applicable under the letters of intent and this was the basis for not providing advice about the risks of continuing to use letters of intent. The Court rejected this as an excuse for TTPM’s failure to provide proper advice. TTPM had held itself to be a “one stop shop” and had put together the contractual documents and the letters of intent. The Court held that in the circumstances TTPM should have advised on the letters of intent or if it was unable to do so, it should have advised the Trust to seek legal advice.

 

Conclusions

 

The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited is another cautionary note to the use of letters of intent and the importance of limiting their use to appropriate circumstances. The decision to use a letter of intent should be carefully considered having regard to the project objectives and inherent risks of using a letter of intent.

 

The Court contrasted building contracts which are “…precise, detailed and structured documents that define the rights, duties and remedies of the parties” with letters of intent, which are “…contracts of a skeletal nature whose classic use is for restricted purposes that do not protect the employer’s interests in the same manner as would the formal contract.”

 

Letters of intent do not fully document the terms of a building contract and should never be seen as an alternative to an executed contract. Where a project manager uses letters of intent inappropriately this can limit the principal’s entitlements in respect of design and liquidated damages and as this case demonstrates, may result in a liability for negligence on the part of the project manager.

 

 

For further information, please contact:

 

Joseph Mulcahy, Partner, Ashurst

jos.mulcahy@ashurst.com

 

Angela Armstrong, Ashurst

angela.armstrong@ashurst.com

 

Ashurst Dispute Resolution Practice Profile in Australia

 

Homegrown Dispute Resolution Law Firms in Australia

 

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