A letter of intent is meant to be a stop-gap before the contract kicks in, but all too often it sparks a dispute – in this case over the words ‘loss and expense’

“Well,” said the judge in the Scottish case of Robertson Group (Construction) Ltd vs Amey Miller Joint Venture, “it’s in the nature of a contract that a party which supplies goods and services expects, or at least hopes, to make a profit of all, or nearly all, commercial activity, and the law must recognise that elementary fact.” But in the Robertson Construction contract, Amey Miller, the employer, was insistent that any profit for the £5m of work done was not an entitlement of the builder. It reckoned that the deal was simple: no profit and no overheads.

So, let me tell you the story. The project is one of these big school jobs at the Royal High School, Edinburgh. In its lifetime of about 850 years, the school has had a fair bit of construction work done to it. This episode saw the Amey Miller group take charge of the task, then go out to tender for the refurb work. Robertson’s £8m bid was all-rightish. So the usual punting around ceremony started. In other words there was the negotiating phase. Snag was, the school wanted the work to start now. And, yes, out sailed the good ship “letter of intent”. I have told you before how the letter of intent is the source of great amusement for lawyers. The construction industry adores the device regardless of the trouble it causes. This time the quarrel was all about what words meant in the letter of intent.

The letter said it was Amey Miller’s intention to enter into a contract for the whole job but meanwhile please start work, but cap the it at £500,000. Then the letter said: “Should the formal contract [for £8m] fail to be entered into for any reason … then all direct costs and directly incurred losses shall be … reimbursed by Amey Miller.” Soon the £500,000 cap was recapped and recapped again. It went to £5m. Meanwhile, the two enterprises manfully continued to punt back and forth the JCT contract bumf. The letter of intent was of course a stop-gap contract, although one can’t help thinking that at £5m it was rather a big stop-gap. Anyway, I don’t know why, but once the £5m was reached the stop-gap was permanently stopped. Then Amey Miller began to point to the words in the stop-gap contract. Or at least it did so once it learned that the contracts account included overheads and profit. Tish-tosh, said the employer: you can’t claim OH&P when the deal is that you can only claim “direct costs and directly incurred losses”.

From time to time this type of argument is run for JCT-type “loss and expense” claims. “Dear me,” says the payer, “you can’t claim profit on top of loss and expense.” Lord Drummond Young went straight to the JCT-style “direct loss and expense” words to fathom what was meant in the letter of intent by the words “all direct costs and directly incurred losses”. This was significantly similar to the well-worn JCT phrase. So the court explored the cases, which looked for whether overheads and profit came within “direct loss and expense”.

I have told you before how the letter of intent is the source of great amusement for lawyers

Look: when you are the victim of a breach of contract you can claim for the ordinary or natural or obvious types of loss caused by the breach. But many claims in building contracts are not a breach of contract; they are rather specific contractual entitlements. Disruption cost is not a “breach” under JCT; it is a right to compensation of “loss and expense”. The judge was firm. If the word “loss” did not cover general overheads and an element of profit, the contractor would have to carry corporate overheads from other sources of income. It was an improbable interpretation of those words to say that OH&P did not refer to “loss”. As for profit, it was a natural and ordinary consequence of carrying out works. If overheads and profit were not recoverable, the failure to earn such commercial contributions from turnover would be properly described as a “loss”. Whether Robertson had stopped at the half a million pound cap, or whatever cap, it was entitled to direct costs and directly incurred losses from the deal. That meant an element of profit.

As to how much profit, the judge said: “Quantity surveyors and estimators are well used to determining an appropriate percentage.”