In Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd  EWCA 2222, the Court of Appeal, reversing the decision of the High Court, held that a liability cap had been incorporated into an interim contract despite the lack of agreement over a final Protocol Agreement.
Buchan, now AMEC, acted as a specialist concrete sub-contractor on two large projects, Wellcome Building and Castlepoint Car Park. They engaged with Hyder, now Arcadis Consulting, to carry out structural design works for the projects.
The plan was that the parties would enter into a Protocol Agreement that would govern Hyder’s work on both Wellcome Building and Castlepoint Car Park. While negotiations were ongoing Hyder began work on Castlepoint Car Park under a letter of instruction from AMEC. However, the anticipated Protocol Agreement was not concluded.
The present dispute arose due to allegations that the construction of Castlepoint Car Park was defective. Buchan sought damages of £40 million against Hyder. Liability was denied by Buchan, but it was submitted in the alternative that if they were found to be liable then liability would be capped in the sum of £610,515 on the basis of a contract.
Of particular relevance to the dispute was a letter of intent (“LOI”) sent via email by Buchan to Hyder on 8th November 2001. That email contained the Protocol Agreement, Schedules to the Agreement and Terms and Conditions. In it, Buchan stated that they intended to use the attached documents for the Wellcome Building Works subject to Hyder’s agreement.
Condition 2A, titled Limit of Liability, in the Terms and Conditions, stated:
‘The Consultant’s liability for defective work under the Agreement shall be limited to whichever is the lesser of the following:
(a) The reasonable direct costs of repair, renewal or reinstatement of any part or part of the sub-contract works to the extent that the Client incurs such costs and/or is or becomes liable either directly or by indirect way of financial contribution to such costs
(b) The sum stated in Schedule 1.’
The sum in Schedule 1 had been left blank at the time but in a letter dated 6 March 2002, the complete version of Schedule 1 specified that the limit of the consultant’s liability was £610,515 – 10% of sub-contract package for insured losses.
Decision of the High Court
The two key issues that had come before the High Court was whether there existed a relevant contract between Buchan and Hyder and if so, whether the liability cap had been successfully incorporated into it.
The High Court held that a contract did exist between the parties. A letter of instruction had been sent on the 6 March 2002 and there was acceptance of those instructions as evidenced by Hyder’s conduct of carrying out the work pursuant to those instructions and subsequently receiving payment for work done.
However, Coulson J held that no liability cap had been incorporated into the contract. Terms and Conditions sent out on 8th November 2001 had been superseded by further correspondence negotiating the Terms and Conditions. Those further Terms and Conditions were then never accepted. There was therefore no liability cap because Schedule 1 was parasitic on the Terms and Conditions, and this was a document that Hyder had never accepted.
Arcadis Consulting (formerly Buchan) appealed. The central question before the Court of Appeal was whether the terms and conditions sent by Buchan to Hyder on 8 November 2001 were incorporated by reference into the Contract.
Decision of the Court of Appeal
Reversing the decision of the High Court, the Court of Appeal held that the liability cap had been incorporated into the contract.
Giving the judgment of the Court of Appeal, Gloster LJ distinguished between the interim contract under which the parties were working and the final contract, the terms of which would supersede the interim contract, once agreed.
The relevant contract in the dispute was the interim contract, and not the final contract because the latter had never been agreed to. The High Court was correct that Hyder had not accepted the Terms and Conditions in the final contract, the Protocol Agreement.
But the same was not true for the interim contract. In Bucher’s letter of instruction dated 13 November 2011, it had stressed that ‘…work done under this instruction is to be on the basis of…the conditions and terms detailed in the Protocol Agreement, Design Consultancy Terms and Conditions in your possession at present.’
Hyder had accepted Bucher’s letter of instruction by carrying out the design works it had been instructed to do and which it was paid for. In doing so, it tacitly accepted the Terms and Conditions, in the document dated 8th November 2011, that was in its possession and which therefore incorporated the liability cap into the interim contract.
The fact that those Terms and Conditions were not agreed upon for the Protocol Agreement did not preclude agreement on those Terms and Conditions as the basis for work done under the interim contract. Nor were those Terms and Conditions superseded. Subsequent correspondence did not supersede the terms of the interim contract if they merely suggested changes to terms in a final contract that had not been agreed upon.
As pointed out by Gloster LJ, the judgment of the High Court in Arcadis Consulting v AMEC led to an extraordinary result, ‘in that the former concluded that, by acting on Buchan’s request in such circumstances, Hyder assumed an unlimited liability for its contractual performance, when it never would have assumed such liability under any contract which it entered into.’
Typically, in instances where a party has undertaken work prior to an agreement on a final contract, there will either have been work undertaken with payment to be made under a quantum meruit or, there will be an agreement on terms that have been referred to in the LOI. Instead, the decision of the High Court placed Hyder into an unrealistic scenario in which a simple contract had been imposed on it with terms that it could not have agreed to enter into.
The Court of Appeal’s judgment is preferable because it accords with the commercial reality that parties that undertake instructions prior to the finalisation of an agreement, are usually doing so on an agreed basis. That agreed basis, as Gloster LJ identified, is not the final contract but the interim or provisional contract.
The crucial difference between the analysis of the High Court and that of the Court of Appeal is that for the former, the contract was tied to the final agreement. It arose only because the final agreement did not materialise, but a contract nevertheless found because work was done and payment was made. But that contract was ‘simple’, because no terms and conditions had been agreed upon for the final contract. It merely provided for performance and payment.
For the latter, however, the contract is independent. The interim contract arises not because work had been done despite the failure to conclude a final agreement, but because the work done evidenced acceptance of the LOI as a standing offer for an independent contract. The terms and conditions of the interim contract were therefore independent from negotiations over the terms and conditions of the final contract.
It should be noted, however, that where a final contract has, in fact, been concluded, it will usually have been intended by the parties to supersede the terms of any interim contract. On the facts of the present case, for instance, the letters of instruction sent by Buchan to Hyder state that, ‘…once the Agreements are executed their terms and conditions shall supersede this letter and shall govern any work done retrospectively.’
The practical take away from all this is that parties should be particularly careful when drafting or responding to LOIs. Where a LOI promises remuneration for work done, its terms and conditions should be treated with scrutiny. This is because there is a risk that work undertaken under the LOI will be under the basis of those terms despite the failure to conclude a final contract. Care should therefore be taken to avoid unexpected obligations or limitations on liability. The safest course of action is for parties to proceed with works only when they have concluded a final agreement.