31 October 2018

The risk of commencing construction without a finalised contract

A recent Court of Appeal decision highlighted the potential implications of not finalising contracts before commencing on construction projects. Below, we explore the details of the case. 

The Case: Arcadis Consulting (UK) Ltd (formerly Hyder Consulting (UK) Ltd) v AMEC (BCS) Ltd (formerly CV Buchan Ltd) [2018] EWCA Civ 2222 (“Arcadis v Amec”)

In this recent case, the Court of Appeal overturned the previous decision and held that a liability cap had been incorporated into a letter of instruction.

What happened?

    • AMEC employed Arcadis to design two construction projects: the Wellcome Building and Castlepoint car park.
    • Work on Castlepoint started when only a letter of instruction was in place, instructing Arcadis to carry out the work under the current "terms and conditions”.
    • The intention was to sign up to a detailed Protocol Agreement (contract) but it was never finalised. The parties exchanged different versions of the document, each including different limitation of liability clauses.
    • After construction, the Castlepoint car park required rebuilding due to defects, caused by Arcadis’ design, at a cost of £40m.
    • Arcadis denied liability and also said if it was liable, its liability was capped at £610,000 under the provisions of the contract it claimed was in place.

At first instance, the judge found that, in the absence of the Protocol Agreement, the letter of instruction was a mere letter of intent. It only gave rise to a “simple contract” including the right to be paid. As the detailed terms and conditions had not been formally agreed, the liability was uncapped.

The Decision

The Court of Appeal decided in favour of Arcadis.  The basis of the decision was as follows:-

    • The Court of Appeal agreed with the first instance judge that a contract existed based on the letter of instruction.
    • It concluded that none of the terms and conditions (in any version of the negotiations between the parties) had been incorporated into the letter of instruction.
    • However, the letter of instruction referred to the applicability of the “terms and conditions…that we are currently working under with yourselves”. The court found this included the terms which were included in the Wellcome Building contract, which included the liability cap.
    • As is usual with these claims, the Court carried out a detailed analysis of all correspondence between the parties as to what had and had not been agreed. The fact that the two Courts came to very different conclusions shows very clearly the risks inherent in litigation.

Conclusion

This case highlights the risk to all parties of starting work before the contract has been agreed in full and signed by both parties. Commencing work while the contract is still being negotiated carries substantial risks for both parties, particularly as it is usually the key commercial clauses that are the last ones to be agreed in negotiation.

This scenario is not unusual, we have seen numerous similar claims, but this case does illustrate the risks associated with these kids of arrangements and the importance of both parties agreeing these in advance.

For more information, or advice on Construction contracts, contact a member of our Construction team.