CLS vs WJG case: The importance of early contract negotiations

A focal point in the recent case of CLS Civil Engineering Ltd v WJG Evans and Sons [2024] EWHC 194 (TCC) is whether an employer is entitled to rely on an overall liability cap in a Letter of Intent.

In this article, Ross Galbraith, partner, and Ellen Williamson, solicitor apprentice, both in our construction team, reflect on the case and discuss its practical implications.

What are the facts?

Following a tender process, the Employer, CLS Civil Engineering Ltd (CLS), engaged a Contractor, WJG Evans and Sons (WJG), to construct a library, retail unit and three apartments. 

Whilst the precise legal and commercial terms of the JCT contract were still to be agreed, the parties agreed to enter into a Letter of Intent (LoI).

The LoI originally included an overall liability cap of £150,000. However, as the parties could not agree the precise legal and commercial terms of the JCT contract, the overall liability cap in the LoI was continually increased over a 14-month period to an eventual total of £1.1 million. 

Proceedings

After CLS terminated WJG’s engagement in respect of the works, WJG brought a claim against CLS for repudiatory breach of contract. 

WJG also issued a final valuation for all work undertaken to date, which totalled £1.4 million and, as such, the parties were disputing a sum of just over £300,000 (being the difference between the overall liability cap in the LoI and WJG’s final valuation).

CLS then brought a claim under Part 8 of the Civil Procedure Rules. Part 8 claims are restricted to claims where there is no material dispute about the facts of what happened, and where evidence from witnesses would not be required. 

In construction, Part 8 is often used for matters that arise out of adjudication. CLS’ claim was mistakenly marked as such a claim.

The issue which the court had to decide was whether:

1. there was a construction contract between the parties and whether the legal relationship was governed by the LoI; and
2. whether WJG were entitled to £1.4 million, as per its final valuation, or whether the Employer would be entitled to rely upon the overall cap on liability in the LoI of £1.1million.

WJG argued that the overall liability cap in the LoI was not applicable and that the terms of the standard form JCT Intermediate Contract 2016 Edition applied to the works. WJG also sought to argue that CLS was estopped from relying on the overall liability cap in the LoI. 

Judgement  

The judge decided that the LoI was binding and, as such, the overall cap on liability of £1.1 million was applicable. The judge said that the JCT contract terms had never been agreed so could not apply.  

The judge also decided that WJG’s arguments of estoppel were weak and had no real prospect of success.   

Practical implications

Although it’s common in practice to enter into a LoI at the start of a project, the approach is also risky for both parties and arguments/questions may arise as to the LoI’s validity, especially if no main building contract is agreed and entered into and a dispute develops.  

We would always recommend that contract negotiations are commenced as early as possible in order to negate the need to enter into a LoI.

A useful practical step will be to provide details of any proposed form of contract at the tender stage so there is transparency between the parties and negotiations can start at a very early point.

That being said, there may be circumstances when there is no option but to enter into a LoI. It’s therefore vitally important that the terms of the LoI are clear with any outstanding items to be agreed listed within the LoI. 

Also, it’s important to include clear limitations within the LoI – for example, an overall liability cap, a list of specific authorised activities to be undertaken by the contractor and an expiry date. 

Any works undertaken by a contractor beyond the limitations in the LoI would then be entirely at their own risk.  

For more information on anything discussed in this article, or on construction law in general, please contact Ross using 0191 211 7999 or [email protected].