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The way to contractual certainty is truly paved with eggshells

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Problems with letters of intent and their contractual effect (or otherwise) were illustrated in the recent case of American Design Associates v Donald Insall Associates . The case also demonstrates some of the risks of relying on standard forms without fully considering their applicability, and the importance of agreeing disputeresolution arrangements.

American Design Associates (ADA), a Hong Kong practice, asked Donald Insall Associates (DIA), based in England, to help it to renovate the old Hongkong and Shanghai Bank building in Shanghai. Having carried out some work on the basis of correspondence, including a letter of intent, DIA left the project, claiming it was owed fees. The matter was referred to an arbitrator. DIA relied upon its own understanding of the situation that it had reached an agreement with ADA that incorporated the arbitration provisions in the RIBA Conditions of Engagement known as CE/95. ADA went to court to challenge the jurisdiction of the arbitrator. His Honour Judge Bowsher QC found that the arbitrator did not have jurisdiction, there being no agreement that any dispute would be referred to arbitration in England. The judgment sets out at some length the dealings between the parties. It makes sobering reading. DIA appears to have sought to protect its position by engaging in careful correspondence and referring to RIBA standard terms. Yet it did not achieve the desired protection of the dispute resolution procedure.

Immediately after ADA's initial approach, DIA wrote to ADA referring to CE/95, which is drafted for use within the UK and, in particular, provides for disputes in the UK. DIA's ongoing correspondence continued to refer to CE/95, and DIA subsequently accepted a letter of intent from ADA that included a reference to CE/95.

You will recall that when looking at the effect of letters of intent, the court will seek to uncover the true intentions of the parties. The judge considered that DIA did not regard the letter of intent as contractually binding. Despite accepting the letter, DIA then sought a collateral agreement to meet its reasonable fees and expenses prior to a 'formal appointment'being in place.

Subsequently, DIA sent ADA a copy of CE/95, partially filled in. The annotations to the standard form did not seek to choose between the dispute resolution provisions for various parts of the UK.

The judge concluded that agreement was never reached on the scope of services, payment, and the relationship between ADA's agreement with its bank and its agreement with DIA. As to the specific question of what was agreed about dispute resolution, ADA had noted in its correspondence that, as the works were outside England, it perceived some difficulty in applying English law. The judge concluded that the correspondence showed ADA had not agreed to the CE/95 arbitration clause: 'If there were a contract, it was made by communications passing between Hong Kong and London, and conduct and conversations in Shanghai, ancillary to a contract made between a Shanghai company and a Hong Kong company about a building project in Shanghai, that latter contract providing for arbitration in China under the laws of China. It is bizarre that a dispute relating to such matters has been brought before an arbitrator in Stratford-upon-Avon.'

Several points arise from this. First, treat letters of intent with caution. They often do not create the binding agreement you assume. One particular tip from this case is, if you must rely on a letter of intent as having created a contractual relationship, avoid subsequently treating it as anything else, for example by asking a further agreement that potentially covers the same ground.

Second, if a standard form does not fit the particular circumstances, it may not provide the protection that you anticipate. Third, remember the importance of agreeing disputeresolution procedures in advance. In crossborder contracts it is common for parties to opt for arbitration, rather than the courts, because arbitration awards are more widely enforceable than judgments in overseas jurisdictions.

But failure to agree where you want any arbitration to take place, and the law that will apply to it, may result in your ending up with a venue and legal system that would not have been your first, or even second, choice.

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