11 March 2015 #Construction
As is quite often the case in relation to building developments, a consultant will provide preliminary services to the developer in expectation of being awarded a contract to provide consultancy services for the entire project. In such circumstances, it can be difficult to ascertain who is liable for the cost of the consultant’s initial services, if the anticipated contract does not materialise.
The law requires the consultant to show that the parties expected the preliminary services to be paid for, in the absence of an express agreement to that effect.
In the recent case of D&K Drost Consult GmbH & Anor v Foremost Leisure (Holdings) Ltd , the Court of Appeal upheld a decision of the High Court that D&K Drost (the Claimant) should be paid for preliminary services (which included negotiating, but not concluding, the purchase of land and applying for, but not obtaining, preliminary planning permission). Following a breakdown in the parties’ relationship Foremost Leisure (the Defendant) employed a different consultant to conclude the preliminary services and take the project forward. The project in question was for the development of a Holiday Inn Express franchise hotel in Germany.
The court found evidence that the parties intended the Claimant to be paid for the preliminary pre-contract services it had supplied in the form of a ‘letter of intent’/conditional letter of agreement from the Defendant, which included the following wording:
“In regards to your contribution to the above mentioned project I herewith submit you the following offer:
To reward your services... which consist of
You will get paid €150,000 plus VAT. Further performances from your side are not necessary.
The sum is fully due upon the granting of a legally effective building permit for the proposed hotel with 120 rooms.”
Following the signing of this letter, the Claimant attended one more meeting and then had nothing further to do with the project. The replacement consultant continued with the project and the site was purchased some 6 months later, with a building permit granted 12 months later. In other words, the Claimant had provided part of the services listed in the letter before being replaced by a third party consultant, who went on to complete those services.
Following the purchase of the site, and the award of the building permit, the Claimant claimed payment of €150,000 plus VAT. The Defendant refused to pay, arguing that the Claimant had been required to provide further services before any payment could be said to be due.
The court agreed with the Claimant that the letter referred to services provided in the past and, in any event, made it clear that the performance of further services was not necessary (“Further performances from your side are not necessary”).
This case serves as an important reminder to be clear as to remuneration from the outset and to properly communicate your expectations. This case was unnecessarily confused because a number of different proposals were offered through a number of intermediaries. Without the signed letter, the Claimant could well have been left without remuneration for the services it provided.
Finally, as lawyers, we are always wary when it comes to the use of letters of intent (for good reason). However, this case shows that letters of intent can have their uses (on the basis that sometimes they are better than nothing).