A cautionary tale on working under letters of intent [November 2018]
It is not uncommon for contractors to start work on the basis of a letter of intent and to postpone the agreement of contract terms to a later date. In some cases, despite terms going back-and-forth between the parties, a formal contract never materialises but the work continues nonetheless. This can prove to be a risky approach, as to which Arcadis v AMEC serves as a cautionary tale.
Recently, the Court of Appeal overturned a TCC judgment in which a design consultant was left with the risk of unlimited liability following the parties’ failure to agree on the final terms and conditions while working under a letter of intent. The Court of Appeal held that a liability cap had been incorporated into the letter of intent between the parties. However, this judgement is a candid reminder of the risks and potentially catastrophic consequences in commencing (and continuing) work under an ambiguous letter of intent, the terms of which may not reflect what you understand to be the scope of the agreement.
AMEC, a specialist concrete sub-contractor, engaged Arcadis to provide design works in connection with two large construction projects. Work commenced under a letter of intent in anticipation of a wider agreement (the “Protocol Agreement”) that was ultimately never finalised. AMEC alleged that the design work on one of the projects was defective, in relation to which the rebuild costs and damages were valued at £40million. Arcadis sought a declaration that its liability had been contractually capped to £610,515 by way of multiple sets of contract terms (and several draft schedules), each containing different limitation of liability clauses, exchanged between the parties.
In the first instance, Coulson J found that, in the absence of a finalised Protocol Agreement, a “simple contract” existed between the parties by virtue of the letter of intent which secured performance and payment. However, despite all three of the draft terms and conditions contemplating the limitation of liability, Arcadis’ liability was held to be uncapped since nothing was finally agreed. In dismissing the apparent harshness of this conclusion, Coulson J concluded that parties should seek to reach a full agreement through a process of negotiation and give-and-take or risk the consequences.
Court of Appeal’s Judgment
Arcadis appealed and the Court of Appeal unanimously overturned the TCC judgment. In doing so, The Right Hon Lady Justice Gloster made the following comments:
Coulson J had, in the first instance, wrongly conflated the interim contract under which Arcadis had carried out the work with the Protocol Agreement (that being the final contract which would supersede the interim contract once agreed). As such, the parties did not have to reach a final agreement on the terms and conditions of the Protocol Agreement for there to be a binding agreement on the terms and conditions of the interim contract.
Further, the parties’ conduct and correspondence indicated that Arcadis had accepted, and was working to, specific terms and conditions exchanged between the parties. These terms and conditions were incorporated by reference into the letter of intent which together formed the interim contract. In particular, the letter of intent stated “[Arcadis’] work is to be carried out in accordance to the Protocol Agreement and Terms and Conditions associated that we are currently working under with yourselves.” Other terms and conditions were subsequently exchanged prior to the letter of intent, however, these were in relation to the negotiation of the Protocol Agreement and did not affect the interim contract. The correspondence revealed that, while the parties had minor differences regarding the incorporated terms and conditions, this did not prevent them from constituting an interim contract pending the final Protocol Agreement. Those terms included an express limitation of liability and subsequent correspondence confirmed the monetary cap.
The TCC judgment was described by Gloster LJ as “an extraordinary result”. In the first instance, Coulson J had concluded that Arcadis had assumed unlimited liability for its contractual performance, despite never proposing to assume such liability under any contract terms exchanged and despite further the fact that the parties had specifically agreed a value for the limitation in relation to the interim contract.
Those who carry out works under letters of intent pending, or otherwise in absence of, a final agreement might breathe a sigh of relief in response to the Court of Appeal’s decision. However, determining whether there was an agreement and the precise terms of the agreement in these situations will be a fact sensitive exercise. While successful in its appeal, Arcadis had to go through an arduous and costly court process to receive the benefit of an agreement which could simply have been achieved through clear communication. Ultimately, parties will continue to proceed at their own risk when commencing work on letters of intent in the hope that a subsequent comprehensive agreement will be finalised.
Case: Arcadis Consulting (UK) Ltd (formerly Hyder Consulting (UK) Ltd) v AMEC (BCS) Ltd (formerly CV Buchan Ltd) This article and/or any information contained herein is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking, or refraining from, any action as a result of the contents of this article.