| Date | 27 August 2003 |
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| Judgment | British Steel Corporation v Cleveland Bridge & Engineering Co Ltd, QBD 21 December 1981 |
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| The Issue | The effect of a Letter of Intent. |
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| Implication |
Whether a Letter of Intent amounts to a binding contract will depend on the particular circumstances. Generally, however, a Letter of Intent will fail on the requirement for agreement on the essential terms. |
printLetters of Intent are widely used in the construction industry despite the difficulties than can be thrown up if subsequently the parties fail to enter into a contract. A typical arrangement where a Letter of Intent is often used is where goods are on long delivery and the purchaser instructs the seller to place orders for materials in advance of contracts being entered into. In the event of there being no subsequent contract there is a very real risk that the parties will end up in dispute over the extent of the liabilities and obligations which flowed from the Letter of Intent. One of the leading cases dealing with Letters of Intent is the case of British Steel Corporation v Cleveland Bridge & Engineering. Although this case was decided some twenty years ago the findings remain relevant today. Cleveland were sub-contractors for the fabrication of steelwork for the Sama Bank in Damman, Saudi Arabia. The bank was to be of an unusual construction, the main body of the building was to be suspended from four columns and was to have a steel latticework frame. There was a requirement for nodes, or connection points, for use at the centres of the latticework. Each of these nodes would appear on the surface of the building when it was finally constructed. It was determined that these nodes could be manufactured out of cast steel and Cleveland approached British Steel who advised that the nodes could indeed be manufactured by one of their subsidiary companies. Following a series of meetings British Steel telexed Cleveland with a budget price for the manufacture of the nodes. Three weeks later Cleveland sent a Letter of Intent to British Steel stating "We are pleased to advise you that it is the intention of Cleveland Bridge & Engineering Co Ltd to enter into a sub-contract with your Company for the supply and delivery of the steel castings which form the roof nodes on this project. The form of sub-contract to be entered into will be our standard form of sub-contract for use in conjunction with the ICE General Conditions of Contract …. and we request that you proceed immediately with the works pending the preparation and issuing to you of the official form of sub-contract". Through its subsidiary company British Steel then arranged for the manufacture of the nodes in expectation of an order from Cleveland. Matters did not, however, progress smoothly. The parties were unable to agree on the specification for the nodes and the configuration of the nodes were changed considerably with the effect that British Steel could not standardise the casting in the manner that they had originally envisaged. Despite this British Steel pressed on with the casting work and nodes were delivered to Saudi Arabia on a piecemeal basis. Meanwhile discussions concerning the proposed contract were proving difficult. The parties could not agree the price for the work which had increased considerably from the initial budget quotation provided by British Steel. The parties were also in dispute over other essential terms of the contract including the period for completion of the work and delay damages. Despite these difficulties British Steel continued to produce and deliver the castings. By December 1979, almost a full twelve months after the Letter of Intent had been issued, all except one of the one hundred and fifty steel nodes had been delivered by British Steel. The final node was not delivered until some four months later, held up as a consequence of a steel strike in the UK. British Steel claimed an amount of £230,000 as the total price of the cast steel nodes and related services provided. Cleveland responded with a set-off and counterclaim amounting to some £870,000 on the grounds that, in breach of contract, British Steel had delivered the nodes late and out of sequence. Unsurprisingly the parties ended up in the commercial court in London. The Judge noted that in most cases where work was done pursuant to a Letter of Intent, it would not matter of whether a contract did or did not come into existence. If the party who had acted on the Letter of Intent was simply claiming payment its claim would usually be based upon a quantum meruit and it would make no difference whether or not that claim was based in contract. The difficulty with a Letter of Intent, however would be where, as here, one party was seeking to claim damages for breach of contract. Accordingly, the question as to whether a contract came into existence was of crucial importance. It was clear that the parties had never agreed the precise and necessary terms of a contract. This was plainly in a state of negotiation, not least on the issues of price, delivery dates and the applicable terms and conditions. The court concluded that there was no binding contract between the parties. The result was that there was simply an obligation in law upon Cleveland to pay a reasonable sum for such work as had been done pursuant to its request contained within the Letter of Intent. Cleveland's set-off and counterclaim failed. If there were no contract between the parties there could be no damages resulting from breach of contract.
CJ-0333
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