ºÃÉ«ÏÈÉúTV

This is a story about a Letter of Intent and the sort of costly mistake that anyone might make. Here is part of the letter; see if you can spot a problem: "Subject to contract, we are pleased to confirm it is our intention to award HOK the role of architect in collaboration with the technical services division of Philipp Holzmann … The detailed negotiation on your appointment will be carried out on our behalf by Gernot Frauenstein and Geoffrey King." It was then signed for and on behalf of AHAG Arena Hanover AG (in formation).

Negotiations did take place. AHAG was the proposed company for the new sports arena at Expo 2000 in Hanover. HOK is the trading name for the architectural practice that eventually did the planning and design works. King is a fellow of the RICS and chairman of Widnell, known nowadays as a cost consultant, project manager and building surveying services provider. Widnell formed various companies and King was a director of Widnell Far East, which provides professional services in construction.

HOK got on with the conceptual design work. It proposed fees of well over £1m for this and for the detailed design. Then there were to be fees for monitoring the construction of the stadium. Big stuff. The fees were not agreed, but the letter of intent went off. It was on AHAG (in formation) notepaper. Have you spotted the problem yet? King and Frauenstein signed the letter.

HOK sent in its fee invoices, setting out the billings for work done thus far. Meanwhile, arrangements for financing the arena works were moving along. Also in the meanwhile, HOK wasn't paid. Frauenstein and King were not hostile to the principle of payment; there was, however, what the judge at trial described as "intelligent procrastination". (Isn't that a wonderful phrase to trot out in a dispute.) Anyway, if you go to Hanover to look for this arena, you won't find it. Commercial factors prevented the project from going ahead. Then came the dispute about all the presumably wasted expenditure. HOK still hadn't been paid. So it sued.

HOK was looking for a contract to hang its fees on. If it could point to one, it didn’t matter if the company was never born

But whom does it sue and on what basis? The first horror point is that the letter of intent was for and on behalf of AHAG (in formation), which was never formed! The Companies Act is ever-so-clear about this: "A contract which is to be made by or on behalf of a company when it has not been formed has effect … as one made with the person purporting to act for the company or as agent for it. And he is personally liable on it." HOK was looking for a contract to hang its £400 000 fee notes on. If it could point to one, it didn't matter that the supposed company was never born. They could pursue King and Frauenstein. True, they had signed the letter of intent, but did that constitute a contract? No, it did not, said the judge. It only indicated an intention to conduct serious exclusive negotiations with the architect's practice. Nor was the letter, which HOK accepted by acting on it, an offer to pay for work carried out by HOK. The letter offered only participation in negotiations. It was not an offer to negotiate a particular professional services standard form contract, which, once agreed, would form a contract. Nor, as was suggested, was the work of HOK done on a speculative basis, since no evidence to that effect was accepted.

So, if the letter of intent only indicated a willingness to negotiate, did those negotiations result in a contract? The judge looked at the documentation flowing to and fro at the time and found "substantial agreement" was reached even to the point of documentation ready for signature. That signature process should have been a mere formality. Usually it is asked for if agreement is reached on "essential terms" – in other words, do we have a workable contract notwithstanding some gaps about detail? So, the negotiations led to a contract. And then can you see how the Companies Act works? The person who signed was liable for the works carried out for the Hanover project. Frauenstein decided not to fight the case. In January, he reached a deal with HOK whereby he would pay just over £100 000 in full and final settlement. On the face of things, HOK can pursue King for the £300 000 balance plus litigation costs.