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Duties of Project Managers, Letters of Intent, Liquidated Damages & Limitations of Liability

September 5, 2012 | Construction Contracts, Letters of Intent, Liquidated Damages, Professional Consultants

Does a Project Manager owe a duty to ensure the building contract is executed?

Can you deduct LADs if the building contract has not been signed?

Can you limit your liability to much less than the amount you are insured for?

The recent case of The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited addressed very interesting issues relating to the duties of project managers, the risks of working under a letter of intent and the effect of clauses which limit liability for loss.

Background

The Trust engaged Turner & Townsend Project Management Limited (“TTPM”) as project managers in relation to 3 phases of construction of student accommodation at Ampleforth College. The Trust engaged Kier Northern to carry out the last phase of the construction works. Work commenced in December 2003 and the Trust was eager for the works to be completed quickly so that the accommodation would be ready for the start of the 2004 academic year.

The parties intended to enter into a JCT 1998 Standard Form of Building Contract With Contractor’s Design. However, in order to get the project off the ground quickly, Kier commenced work under a letter of intent, which stated that the JCT contract would not bind the parties until it was executed.

Unfortunately, various contractual issues delayed the execution of the contract. In order to allow the works to continue, TTPM continued to advise the Trust to issue letters of intent. In the end, the project achieved completion without the building contract having been executed.

The Trust got into a dispute with Kier about delay and sought to recover £750,000 of LADs in accordance with the terms of the intended JCT contract.  Kier alleged that it was entitled to extensions of time and prolongation costs, and denied liability for LADs because the terms of the JCT contract did not apply. The Trust obtained legal advice which confirmed that Kier was not liable to pay LADs under the terms of the JCT contract because the letters of intent clearly stated that the terms of the JCT contract did not apply and therefore the LADs provision was not incorporated.

The Trust settled its dispute with Kier at mediation on the basis that Kier would not receive any additional payments and the Trust would not receive LADs. The Trust then commenced proceedings against TTPM, alleging that if they had acted with the care and skill reasonably to be expected of a project manager, the building contract would have been executed and Kier would have been liable to pay LADs.

Did TTPM owe a duty to procure an executed building contract?

TTPM’s responsibilities as project manager had included facilitating the procurement of a building contractor and arranging for the building contract to be entered into. The court considered that TTPM’s role in finalising the contractual arrangements was of central importance. 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 order to decide whether TTPM had been negligent, TTPM had to be judged by the standard of the ordinary skilled man exercising and professing to have a special skill in project management.

The court found that TTPM had breached their duty by failing to take the steps required of a reasonably competent project manager. In particular, TTPM had failed to focus adequately on the outstanding matters holding up the execution of the contract and work urgently to resolve those matters. TTPM also failed to put pressure on Kier to sign the contract.

The court commented that TTPM had effectively treated the contract as a “dispensable luxury” by proceeding on the basis that it was appropriate to keep repeatedly issuing letters of intent. A reasonably competent project manager would have advised the Trust that letters of intent were inappropriate and could prejudice the Trust’s position.

What loss did the Trust suffer?

In order to determine the loss the Trust had suffered due to TTPM’s breach, the court had to decide what the likely outcome would have been if TTPM had not been negligent. This involved considering:

1. whether Kier would have executed the contract;

2. whether the Trust’s negotiating position with Kier would therefore have been stronger; and

3. whether or not the Trust would have obtained a better result at mediation.

In deciding whether Kier might have been unwilling to execute the contract at any point, the court noted that none of the issues which had stood in the way of finalising the contract had been impossible to overcome. Therefore, up until September 2004, there was no reason to suppose Kier would not have entered into the contract. However, from October 2004 onwards, the delays to the project meant Kier would probably not have entered into the contract without substantially re-negotiating the terms to protect itself from the risks of delay. On this basis, the court considered that there was a two-thirds chance that Kier would have signed the building contract if TTPM had not acted negligently.

Had Kier signed the contract, the court was of the view that the Trust’s ability to bring a claim against Kier would have been improved significantly because there would have been no doubt that the Trust had the power to deduct LADs. Whilst it was possible that Kier might have challenged the validity of the LADs provision, Kier did not have a strong argument in this regard, as it had never raised any real objection to the level of LADs and the courts lean in favour of upholding LADs clauses in contracts which have been freely entered into.

Turning to consider the Trust’s likely prospects in the mediation, the court decided that the Trust would have aimed for a substantial recovery of LADs from Kier, but would ultimately have agreed a reasonable settlement. Taking into account the risk of counterclaims from Kier and the fact that the Trust would have wished to avoid the risk of Kier challenging the validity of the LADs, the court decided that the parties would have probably agreed on a settlement figure for LADs of £340,000. As there was only a two-thirds chance that Kier would have executed the contract, this meant the Trust was entitled to damages of £226,667 from TTPM.

Could TTPM rely on a clause limiting its liability to the Trust?

TTPM had sent the Trust a “Terms of Appointment” document containing a clause which provided that TTPM’s liability to the Trust would not exceed the total fees payable to TTPM i.e. £111,321. The Trust argued that the limitation of liability clause was unfair and therefore invalid by virtue of the Unfair Contract Terms Act 1977, which provides that a clause limiting liability for loss or damage will be invalid if it is unreasonable. For the purposes of determining what is reasonable, it is necessary to consider the circumstances known to the parties when the contract was made, the financial resources of the party seeking to limit liability and the extent to which that party can cover himself by insurance.

TTPM argued that the terms of the limitation of liability clause were clear and unambiguous, and that as the parties had equal bargaining power they should be allowed to apportion risk as they see fit.

The court decided that even though the limitation clause was plain to read and understand, it was nevertheless unreasonable, primarily because TTPM’s appointment required them to maintain £10m professional indemnity insurance (the cost of which TTPM was essentially passing onto the Trust via their fees), but the limitation clause purported to limit TTPM’s liability to just £111,321. This meant that although the parties had agreed on a certain level of insurance against risk, most of the insurance was irrelevant because TTPM’s liability was capped at such a low level. Furthermore, given that TTPM had already been engaged by the Trust on the 2 previous phases of construction, it was unreasonable for TTMP to seek to introduce an onerous limitation clause for the third phase without specifically drawing it to the Trust’s attention.

Summary

This case demonstrates the real dangers of working under a letter of intent. Letters of intent must never be viewed as an appropriate substitute for a proper contract, as they fail to properly safeguard the parties’ rights.

All consultants who assume responsibility for arranging the contract documents should be aware that they must take all reasonable steps to ensure the contract is executed. To avoid a potential negligence claim, it is essential to remain focused on obtaining a signed contract as quickly as possible.

The general principle that the parties to a contract are free to agree what they like may not be upheld if a clause is manifestly unreasonable or disproportionate. Anyone seeking to rely on a clause limiting their liability to a very low level should ensure attention is drawn to the clause at the outset to avoid arguments that it is unreasonable.

 

This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.

Wakefield Office

17 Navigation Court
Calder Park
Wakefield
West Yorkshire
WF2 7BJ
Tel: 01924 258719
Fax: 01924 257666
enquiries@hklegal.co.uk

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London
EC4R 1BB
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