Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] EWHC 2509 (TCC), 25 October 2016

This case highlights the risks where a simple contract is found to have been formed before more detailed terms are agreed.  The court found that a contract had come into force on the basis of a letter of intent and commencement of work while the parties negotiated more detailed terms to govern the work retrospectively.  No more detailed contract was ever executed.  Although every set of terms proposed by the defendant included a limit on the claimant's liability, the judge found that it was impossible to construe a binding agreement in respect of any one of the proposed versions.  The court refused to grant the claimant a declaration that its liability was limited to GBP 610,515, leaving it exposed to a GBP 40 million claim by the defendant.

The defendant, a specialist concrete sub-contractor, engaged the claimant for design services in relation to two large projects in anticipation of a wider agreement between the parties.  The defendant proposed a suite of documents (the Contract Documents), comprising an umbrella agreement (which the parties called the Protocol Agreement) and various schedules, including a schedule containing terms and conditions and project-specific schedules.  Although the defendant sent several different drafts to the claimant, the Contract Documents were never finalised or executed.  

Key events and correspondence  

After a "kick-off" meeting for the Castlepoint Car Park project in February 2002, the claimant started design work and requested a "formal letter of instruction […] subject to preparation and signature of the services agreement in due course".  On 6 March 2002, the defendant sent two letters to the claimant.  The first letter (the Instruction Letter) confirmed (i) the defendant's instruction to commence work in accordance with the Contract Documents and the claimant's quotation of GBP 285,000; (ii) that pending finalisation of the Contract Documents the defendant would pay the claimant up to a maximum amount; and (iii) that once the Contract Documents were executed their terms would supersede the Instruction Letter and retrospectively govern work done.  In the second letter the defendant wrote that it considered that the Contract Documents should apply to all work executed by the claimant and attached revised drafts (including an amended limitation of liability clause).  

Over the following months, the defendant chased the claimant for agreement to the Contract Documents.  In August 2002, the claimant responded, proposing what the judge described as a "complete rewrite" of the limitation-of-liability clause.  In the end, in the absence of executed Contract Documents, the design work was completed under extensions to the expenditure limit in the Instruction Letter.  

Castlepoint Car Park is alleged to be defective and may need to be rebuilt, at a cost of many tens of millions of pounds.  Although the claimant denied liability, it also sought a declaration that its liability was in any event limited to GBP 610,515, a figure included in an incomplete schedule sent by the defendant to the claimant on 6 March 2002. 

Was there a contract between the parties?  

Coulson J held that there was a binding, simple contract between the parties.  He rejected the argument that the lack of the formal detailed contract envisaged in the parties' correspondence precluded the existence of any contractual relationship, finding that this was contrary to the legal principles determining whether or not a binding contract exists.  As summarised by Lord Clarke in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH [2010] 1 WLR 753, this did not depend on the parties' subjective state of mind, but whether the parties' words or conduct led objectively to a conclusion that they intended to create legal relations and had agreed on all the terms which they regarded or the law required as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties had not been finalised, an objective appraisal of their words and conduct might nonetheless lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.  Moreover, in circumstances where works had been carried out, it would usually be implausible to argue that there was no contract.  

Coulson J found that the Instruction Letter had all the hallmarks of a letter of intent, namely an instruction to carry out work up to a certain value on an interim basis, pending the agreement of a formal contract.  He observed that the courts had repeatedly found that, in normal circumstances, arrangements evidenced by letters of intent were a form of simple contract, and quoted Akenhead J in Diamond Build Ltd v Clapham Park Homes Ltd [2008] EWHC 1439 that it was not a particular difficulty for the court to find a contract in the circumstances of a letter of intent which was not only signed but also acted on by the parties; this was so, even if the parties intended ultimately to conclude a detailed contract (Bryen and Langley Ltd v Boston [2005] EWCA Civ 973).  

The judge suggested that the principal way in which parties could indicate that they did not intend to enter into legal relations until the final contract was signed was by marking their pre-contract correspondence "subject to contract", which the parties had not done in this case (Regalian Properties Plc v London Dockland Development Corporation [1995] 1 WLR 212). 

Were any terms and conditions incorporated into the simple contract?  

Coulson J concluded that no version of the draft terms and conditions had been incorporated into the simple contract, on the basis that the first version had been superseded (and was the subject of expressly objection by the claimant), the second had not been identified (no copies of these terms and conditions could be found) and the third was never agreed.  He considered that the defendant's direction in the Instruction Letter for the claimant to start work in accordance with the "Protocol Agreement and Terms and Conditions associated that we are currently working under with yourselves" was merely a general reference to the terms that were still being negotiated.  

With respect to the limit on liability, the figure put forward by the claimant had appeared in a schedule, which the judge analysed as dependent ("parasitic") on agreement of the terms and conditions.  He also found it relevant that, as restated by Briggs LJ in Nobahar-Cookson v The Hut Group [2016] EWCA Civ 128, "the parties are not lightly to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect". 

The judge emphasised that the law required that, on an objective assessment, there had been a final and unqualified expression of assent (Day Morris Associates v Voyce [2003] EWCA Civ 189).  The claimant had failed to say clearly and unequivocally that it accepted any part of a set of terms.  He considered it therefore impossible as a matter of law to "stop the music" at any stage and construe an unequivocal and binding agreement in respect of any one of the three competing versions of the terms and conditions.  

Ultimately, the judge concluded that there was simply "too much uncertainty and too much that was not agreed" for the court to conclude on an objective analysis of the correspondence that the parties intended to be bound by the liability cap.  Although he commented that the court should always strive to find a concluded contract in circumstances where work has been performed (and did indeed find that a simple contract had been formed), the court was "not entitled to rewrite history so as to incorporate into that contract express terms which were not the subject of a clear and binding agreement".

Comment 

This was indeed, as the judge described it, a "case with something of a sting in its tail", at least for the claimant, whose failure to accept any of the terms offered (or negotiate terms it preferred) in a timely fashion left it with unlimited liability.  It is also a reminder of the risks of commencing work under a letter of intent, a device which the judge commented was commonly used – sometimes without adequate care and attention – in the construction industry.  Parties should keep in mind that in normal circumstances a simple contract is likely to be formed and ensure that the letter of intent is drafted such that any critical terms, such as a limitation of liability, are in place.  More generally, the case is a striking illustration of the principle that the court will only give contractual effect to the parties' objective agreement rather than subjective intentions.  Although every draft of the terms and conditions (including those proposed by the defendant) included a limitation of the claimant's liability, and despite the court's willingness to find a concluded contract of some kind where work has been performed, in the absence of one clearly agreed limit, it was impossible for the court to "stop the music" at any one of the competing versions.  Finally, the case also includes some pragmatic advice from Coulson J, who warned that it "starkly demonstrates the commercial truism that it is usually better for a party to reach a full agreement (which in this case would almost certainly have included some sort of cap on their liability) through a process of negotiation and give-and-take, rather than to delay and then fail to reach any detailed agreement at all."