Diamond Build Ltd v Clapham Park Homes Ltd

A letter of intent may create a binding interim contract even where the parties expect a formal construction contract to follow. The question is one of construction, assessed against the wording of the letter and the parties’ conduct. Where the letter specifies the work, remuneration, timing and obligations pending execution of the formal contract, it may regulate the parties’ relationship until that contract is signed. Performance under tender rates, interim valuations and instructions does not necessarily establish that the letter has been abandoned or that the formal contract has retrospectively replaced it. An agreed cap on recoverable costs remains effective, subject to payment for additional work separately ordered and damages for breach of the interim agreement.

Clapham Park Homes Ltd invited Diamond Build Ltd to tender for refurbishment works. The tender contemplated a JCT Intermediate Form of Building Contract, 2005 edition, with amendments. The employer issued and the contractor accepted a letter of intent requiring the works to proceed, promising reimbursement of reasonable costs up to £250,000 if the formal contract was not executed, and providing that the letter’s undertakings would be extinguished on execution of that contract.

The works proceeded, but the formal contract was not signed before the employer terminated further work. Diamond Build sought a declaration that the letter of intent had been superseded by the JCT contract, alternatively relying on estoppel. The central issues were the legal effect of the letter, the scope of the cost cap, and whether the parties’ conduct established abandonment or a convention that the formal contract governed.

1. Claim dismissed. The letter of intent, once signed and accepted, created a binding interim contract. Its terms were sufficiently certain: they identified the commencement and completion requirements, the contract sum and the employer’s obligation to reimburse reasonable costs, subject to the £250,000 cap.
2. The letter was not merely an instruction to mobilise. Its requirement that the contractor take possession and proceed regularly and diligently contemplated performance of the works. The reference to the Construction (Design and Management) Regulations 2007 also supported that construction.
3. The parties’ expectation of a formal contract under seal did not prevent the letter from having immediate contractual effect. Properly construed, the letter regulated the parties’ rights and obligations until the formal JCT contract was executed. It did not provide that the interim contract would lapse merely when execution became possible.
4. The reasonable-cost entitlement included applicable profit and overheads during the interim period. The exclusion of profit and overheads applied to the period after notification that no further work was to be carried out. The cap applied to the tendered work, but separately ordered additional or different work could attract payment above the cap on a quantum meruit, implied-contract or restitutionary basis. Damages for breach of the letter were likewise not subject to the cap.
5. No estoppel arose. References in meeting minutes to the contract documents still being issued, and the parties’ conduct in using tender rates, issuing instructions and making valuations, were consistent with an anticipated formal contract operating retrospectively. Neither representation nor convention established that the letter had been abandoned or that execution was unnecessary.