Letters of intent are paved with good intentions, but can trigger endless legal manoeuvres. A joyous time for lawyers but for nobody else. Here the couple to fall out were Skanska and supermarket chain Somerfield

Skanska and supermarket folk Somerfield have had an up-and-down relationship this past year. They have been arguing about the meaning of their jointly signed “letter of intent”.

I was about to poke a stick at the folk who keep using those confounded letters of intent but truth to tell, they are part of ordinary, everyday, commercial dealings, especially in construction, and finding out what the letter means is no more a pain than finding out what a word, a phrase, a clause or a document intends in a full blown contract.

This case is simply a lesson in fathoming what the parties intended by the words used in their bargain. When it came to trial, the first judge accepted the arguments of Skanska but in the Court of Appeal, it went the other way. The first judge’s decision was convincing, but then so was the opposite one.

When arguing about the meaning of words and phrases, it’s nip and tuck which way the adjudicator, arbitrator or judge will go. One author suggests that the interpretive tools at the disposal of a tribunal can be deployed to achieve a result that the tribunal perceives as, heaven help us, “right”. In other words, there’s a chance that contracts are construed purely on “merits”. That’s a nuisance to the parties because it’s not the correct way to decide disputes.

Somerfield has about 1,300 stores across the land, which all need their locks oiling and ballcocks adjusted. It decided to concentrate on cans of soup, rather than replacing light bulbs so it got EC Harris to get bids for maintenance works. One bidder was Skanska, then called Kvaerner Rashleigh Weatherfoil.

They all became friendly in mid-2000. The stores couldn’t wait while all the lawyering was done to tee up the contract. Broken windows needed replacing, gutters were grubby, drains blocked. Out trotted what I call a “meanwhile” agreement, headed “subject to contract”. The happy pair were edging their way into marriage and were meanwhile “engaged”.

Out trotted a ‘meanwhile’ agreement, headed ‘subject to contract’. The happy pair were edging into marriage and were
meanwhile ‘engaged’

Now consider, what is it that married folk do that the merely engaged cannot? Turn to the meanwhile letter in which lurks the sentence: “While we are negotiating the terms of the agreement, you will provide the services under the terms of the contract from 28 August 2000 to 27 October 2000.”

Actually the negotiations went on and on for three years, and meanwhile Skanska had continued and was paid for “the services under the terms of the contract”. The contract was the one proposed by Somerfield in the invitation to tender.

So what do the words “provide the services under the terms of the contract” mean? Easy, said Skanska: they mean it will provide the services described in the proposed contract. Easy, said Somerfield: they mean Skanska will provide the services described, under the proposed contract. Concentrate please. Do the words indicate that Skanska was to supply the services under the proposed contract, or was it to supply the services described in the contract, but not actually under it? Crystal clear? When Skanska and Somerfield had a tiff, the meaning of their words became important.

There are rules for interpreting contracts, and previous well-known cases. The rules boil down to this: first, it is dangerous to try to construe the words by themselves. It’s a sin to ask each party what it meant to say. The intentions of the parties is gleaned from the words used in context, informed by commercial common sense. There is enough scope in that to end up with whatever result you like. When you are one of the parties trying to understand the words used, you will favour what suits you.

The Court of Appeal was convinced the words meant the services to be supplied were to be supplied according to the rules in the contract, not that the deal was to identify the services by reference to the contract.

“I am firmly of the opinion that that is not the natural or primary meaning the words convey to an ordinary speaker of English,” said the Court of Appeal. Mind you, that’s what the previous judge said when he construed the same words in the opposite way. Easy, isn’t it?

Whilst we are negotiating the terms of agreement, you will provide the services under the terms of the contract.

Do you know what they are talking about?

Nope – I just fire the arrows.