UK: Letters Of Intent: More Salutary Lessons From The Court Of Appeal

The Courts’ time has again been occupied by a dispute concerning a letter of intent. In this recent case the Court of Appeal considered a letter of intent which included a temporary arrangement for the provision of facilities management services by Skanska to Somerfield Stores. This judgment reminds us of the following:

• The dangers of using letters of intent to start works early when the terms of the contract have not been agreed.

• Judges should not rush to strain the meaning of words even if that leads to a result which does not appear to them to be commercially reasonable.

• The term "subject to contract" as a label does not always mean that no contract is enforceable.

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The Courts’ time has again been occupied by a dispute concerning a letter of intent. In this recent case the Court of Appeal considered a letter of intent which included a temporary arrangement for the provision of facilities management services by Skanska to Somerfield Stores. This judgment reminds us of the following:

• The dangers of using letters of intent to start works early when the terms of the contract have not been agreed.

• Judges should not rush to strain the meaning of words even if that leads to a result which does not appear to them to be commercially reasonable.

• The term "subject to contract" as a label does not always mean that no contract is enforceable.

In June 2000, Somerfield (the well known supermarket operator) invited Skanska to tender for the provision of maintenance services to its properties for a 3 year period. A draft contract known as the "Facilities Management Agreement" (FMA) was attached to Somerfield’s letter. Negotiations ensued over the terms of the FMA but before it was concluded, Somerfield decided that it wanted to receive Skanska’s services immediately so it sent Skanska a Letter of Intent.

The Letter of Intent included the following:

• It was expressed to be "subject to contract".

• Somerfield requested the provision of services "which are more particularly described in the draft contract enclosed with the Tender".

• The letter also stated "you will provide the services under the terms of the Contract from 28 August 2000… until 27 October 2000 ("the Initial Period").

A final contract was never concluded, although two extensions to the temporary agreement were granted until January 2001. A dispute arose and Skanska sought to enforce certain terms of the FMA. During the dispute it was common ground between the parties that although the letter of intent was headed "subject to contract" it did include a contract relating to the provision of "services". This reminds us that documents headed "subject to contract" will not necessarily be devoid of all contractual effect.

The Judge in the Technology and Construction Court ("TCC") accepted Skanska’s argument that the Letter of Intent incorporated only the terms of the FMA that were necessary to define the services Skanska was to provide. In summary, he interpreted the words in the Letter of Intent by giving consideration to the surrounding circumstances in which they were written.

The Court of Appeal disagreed with the Judge and noted the following:

• The surrounding circumstances and commercial commonsense do not represent a licence to the court to re-write a contract merely because its terms seem somewhat unexpected, a little unreasonable or not commercially very wise.

• The contract will contain the words the parties have chosen to use in order to identify their contractual rights and obligations… they have control over the words they use and what they agree.

• The court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may, must or should have thought or intended. Judges are not always the most commercially minded let alone the most commercially experienced, of people, and should, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood.

The Court held that the words "you will provide the services under the terms of the contract" should be given their natural meaning (that is, the provision of the services required by the letter was to be governed by the draft FMA appended to it). Their reasoning was that the parties were prepared to be bound by the terms of the FMA for a short period whilst negotiations continued i.e. they were content with its general thrust.

The Court also noted that the services were of a relatively complex nature, including over 300 different types of operation, and therefore it was more likely than not that the parties would have expected to have fairly detailed provisions, such as those contained in the June FMA, rather than virtually no express terms.

The Judge in the TCC had erred in holding the Letter of Intent incorporated only the terms of the FMA that were necessary to define the services Skanska was to provide. The natural and ordinary meaning of the words "under the terms of the contract" was that the terms of the draft contract would govern the services to be provided under the temporary agreement (except to the extent they were inconsistent with the terms of the letter itself) without being limited to identifying the services by reference to the draft contract.

The Court of Appeal concluded the matter would be sent back to the Judge in the TCC to enable him to decide which of the terms of the FMA would apply to the temporary arrangement.

Case: Somerfield Stores Ltd v Skanska Rashleigh Weatherfoil Ltd [2006] EWCA Civ 1732

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 11/01/2007.