Background:

AMEC BCS Ltd (“AMEC”) was a concrete sub-contractor on both the Wellcome Centre (“Project 1”) and Castlepoint car park (“Project 2”) construction projects. It engaged Arcadis Consulting (UK) Ltd (“Arcadis”) to carry out design work to both these projects. The parties first agreed terms in relation to Project 1 on 8 November 2001 (“the November Terms”). The plan was that both parties would enter into an overarching “Protocol Agreement” which would govern all works under both projects. However, prior to finalising the T&Cs of this Agreement, each project would have specific contracts but carried out to the same general T&Cs. AMEC received instructions from the Employer to start work on Project 2. AMEC instructed Arcadis through 2 letters from 6 March 2002 to commence work according to the terms “that we are currently working under”. Arcadis sent an acknowledgment on 8 March and stated certain terms still needed to be agreed in a letter of 22 March. The Protocol Agreement was never formally agreed between Arcadis and AMEC and it later transpired that works to Project 2 were defective. The cost of cure (demolition and reconstruction) was estimated to be c. £40 million. Arcadis brought a claim to the TCC, seeking a declaration that the T&Cs that AMEC had offered on 6 March 2002 were the November Terms, which stated that Arcadis’ liability would be limited to £610,515. AMEC argued that no limit of liability had been formally agreed.

Coulson J (as he was at the time), handing down his judgment in the TCC[i], found that in the absence of the Protocol Agreement, there was no limit of liability for Arcadis’ works. He accepted that under the legal principles derived from G Percy Trentham v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep. 25, the courts should strive to find a contract where work has been performed and that a presumption stands towards such an outcome in order to avoid quantum meruit claims. In the absence of finalising the Protocol Agreement, he found a binding, “simple” contract between the parties, formed through a letter of intent, which Arcadis accepted through the conduct of commencing the works, and which did not incorporate the November Terms (including the limitation on liability).

The Court of Appeal have overturned this decision.

Decision:

Gloster LJ (with whom Holroyde and Underhill LJJ agreed) found that the parties had agreed terms to limit Arcadis’ liability to £610,515. She identified that the following issues were relevant:

    1. i) Whether the terms of the first 6 March Letter were accepted by Arcadis in their letters prior to commencing works
    2. ii) Whether Coulson J had erred in failing to distinguish between the interim contract (“the Contract”) and the Protocol Agreement which was never agreed
    3. iii) Whether Coulson J had erred in mistakenly construing relevant documents which evidenced the agreement

In relation to i) Gloster LJ found that Arcadis’ submissions on offer and acceptance made sense:

  • AMEC’s 6 March letters (including the second letter with the liability limitation in the schedule) constituted an offer from AMEC, and the best evidence of acceptance of this offer was the conduct of undertaking the works (although the letters of 8 and 22 March sent by Arcadis also point towards acceptance).
  • The legal relationship arose at the point of acceptance. The works were therefore started under a fully formed interim contract. It was not material that Arcadis had not expressly accepted the terms by identifying the specific clauses or schedules, as there were no express rejections or counter-offers to these terms.

Gloster LJ, in considering the distinction in ii), found that as well as the Protocol Agreement which both parties had intended to conclude, there was an interim contract with finalised terms in place when Arcadis commenced works on both projects.

  • The effect of this is that the parties did not have to reach certainty of T&Cs on the Protocol Agreement for them to have a binding agreement on the T&Cs of the interim contract.
  • New versions of T&Cs exchanged in subsequent negotiations for the Protocol Agreement did not supersede or undermine the interim contract T&Cs – “it would not have made commercial sense …unless the parties explicitly stated the same”. The terms would only supersede if the Protocol Agreement were finalised.

Turning to iii) she rejected Coulson J’s interpretation that the parties agreeing to “terms and conditions we are currently working under with yourselves”, as stated in the letter of intent, meant that there was still uncertainty of terms as they were under negotiation:

  • This was not the “natural and ordinary meaning” of “working under”, which should be contrasted with “working on”.

Implications:

The construction industry is a fast-paced sector where parties are regularly time-pressured to complete extensive projects to challenging deadlines. Although not ideal, often parties choose to commence works prior to finalising all T&Cs and executing a final contract. In such scenarios, the parties will have entered into preliminary negotiations and might choose to rely on a letter of intent.

This decision is fact-specific. However, it can give some comfort to contractors who have commenced works subject to agreeing a final contract. Interestingly, the November Terms themselves contained outstanding (although minor) matters to resolve, and Gloster LJ said the reasoning in British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] 1 All E.R. 504 was another reason to decide differently. She suggested it was an “extraordinary result” to allow unlimited liability to be accepted by conduct where a contractor would never agree to such terms under a formal contract. Perhaps it might not be a step too far to suggest the court will view a party’s silence to terms when accepting by conduct as no greater acceptance of responsibility than they would have agreed in the negotiations that follow, especially where the other party is aware of any proposed caps at the time of instruction.

Practical Tips 

  • This case is a warning to all contractors (and Employers!) about the so-called ‘pre-contract’ stage. Contractors should not rely too heavily on agreeing a formal, detailed agreement in the future. Employers must be clear about their expectations.
  • If works are to begin prior to a formal final contract, agreeing major terms at this interim stage is a must, including the parties’ payment obligations, limits of liability and warranties and indemnities.
  • Parties should note that letters of intent and proceeding with works can be construed as offers and/or acceptance, leading to legally binding contracts being in place without any formal written agreement, and despite there being unresolved issues. Therefore parties need to carefully balance taking a pragmatic approach towards pre-contract works against the risks that are inherent in proceeding with works and issuing or responding to letters of intent.

[i] Arcadis Consulting (UK) Ltd (formerly Hyder Consulting (UK) Ltd) v AMEC (BCS) Ltd (formerly CV Buchan Ltd) Queen’s Bench Division (Technology & Construction Court) [2016] EWHC 2509 (TCC)

We have extensive experience advising on construction contracts and negotiations, and would be happy to advise further on strategies relating to interim works. Juli Lau is an Associate in the Infrastructure team at Sharpe Pritchard. Alexandra Bellis is a Trainee Solicitor at Sharpe Pritchard.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.


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