UK: The Pitfalls of Starting Work Without a Formal Agreement: Court of Appeal ruling in Arcadis Consulting v AMEC

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11-2018

Arcadis Consulting (UK) Limited (formerly Hyder Consulting (UK) Limited) v AMEC (BCS) Limited (formerly CV Buchan Limited) [2018] EWCA Civ 2222

The Court of Appeal has considered multiple exchanges of proposed contract terms and correspondence in order to determine the terms on which two parties contracted for design work and whether a cap on liability was agreed between them.

The case serves as a useful reminder of the pitfalls of starting work before a signed contract is in place, and of the need for clarity in negotiating multiple sets of terms simultaneously.

Facts

AMEC was engaged as a specialist concrete sub-contractor on a project in Bournemouth known as Castlepoint Car Park ("Castlepoint"). AMEC in turn engaged Arcadis to perform design work on the project. Castlepoint is allegedly defective, and may need to be demolished and rebuilt. Having settled its dispute with the main contractor Kier, AMEC is seeking damages from Arcadis of around £40m.

The dispute between AMEC and Arcadis in the Court of Appeal turned on what terms they had agreed for the Castlepoint work, and in particular whether Arcadis' liability was capped by those terms. The parties had initially agreed to enter into an umbrella agreement or 'protocol' to govern all projects for which Arcadis was engaged by AMEC, but at the time that the Castlepoint work was started the protocol had not been finalised. The parties were also negotiating the terms of engagement between them for a separate project, the Wellcome Building, at around the same time. Multiple rounds of correspondence were exchanged between the parties, some of which attached draft terms, between November 2001 and August 2002. Arcadis performed the Castlepoint work from around March 2002 onwards. No agreement governing the Castlepoint work was ever signed and the protocol was not finalised during the life of the Castlepoint project.

The parties' critical exchanges were:

  • An email of 8 November 2001, attaching terms which included Condition 2A, a limit of liability. Condition 2A limited Arcadis' liability for defective work to the lesser of (a) reasonable direct costs of repair, renewal and/or reinstatement, to the extent that AMEC became liable for such costs; or (b) an identified monetary cap which had been left blank. The covering email referred to the Wellcome Building project, but did not mention Castlepoint ("November Terms");
  • A further set of terms circulated in January 2002 which varied those circulated in November 2001 and proposed a limit of liability in the sum of £110,000 ("January Terms");
  • A letter from AMEC on 6 March 2002, which instructed Arcadis to start work on Castlepoint and stated that the work was "to be carried out in accordance to the Protocol Agreement and Terms and Conditions associated that we [AMEC] are currently working under with yourselves" ("First Letter of 6 March"); and
  • A second letter from AMEC on 6 March 2002 which attached various schedules, one of which proposed a limit on Arcadis' liability of £610,515 ("Second Letter of 6 March").

In the Technology and Construction Court, Coulson J held that the parties' contract had been formed by the First Letter of 6 March, together with Arcadis' acceptance of that letter either by its subsequent letters or by its conduct in undertaking the work. He found however that the contract was one by which Arcadis would carry out design work and be paid for it, and that – because none of the sets of terms exchanged between the parties had been clearly and unequivocally accepted by Arcadis - no further terms were incorporated by reference into that contract. As a result there was no contractual limit on Arcadis' liability to AMEC.

The Court of Appeal Decision

A unanimous Court of Appeal overturned the TCC's ruling. In a judgment given by Dame Elizabeth Gloster, the Court of Appeal found that the parties' contract was formed by the First Letter of 6 March 2018 and Arcadis' acceptance in correspondence (or more likely) by conduct of all of the terms of that letter. It also considered that a set of terms exchanged between the parties had in fact been incorporated by reference into that contract.

The Court of Appeal found that there was a distinction between the "interim contract" under which the parties were performing ongoing work, and the "final contract" (or protocol), which was intended to supersede the interim contract once agreed. The parties had decided to "stop the music" in relation to the terms that applied to ongoing work, but it was nonetheless clear that the protocol was continuing to be negotiated and would (eventually) supersede them.

The Court of Appeal also disagreed with the trial judge as to whether Arcadis had accepted the November Terms, citing conduct and correspondence from Arcadis in November and December 2001 by which Arcadis confirmed that it was working to those terms. Although there were outstanding matters of difference between the parties in relation to the November Terms, it was clear from the parties' letters that they were not considered to be major differences and did not prevent the November Terms from constituting a complete "interim contract" pending finalisation of the protocol. The January Terms were held, in contrast, never to have been accepted by Arcadis. Further, the First Letter of 6 March could not have incorporated those terms circulated later the same day under cover of the Second Letter of 6 March.

The Court of Appeal held that, although the November Terms were, at the time of circulation, said to relate specifically to the Wellcome Building project, they were the agreed terms in place between the parties as at the time of the First Letter of 6 March and it was these terms that were referred to and incorporated by reference into it. The cap in Condition 2A(a) of the November Terms therefore applied to the damages sought by AMEC from Arcadis.

Key Practice Points

Although the Court of Appeal's decision does not touch on any new points of law, there are a number of key practical points to be taken from it.

  • First, it serves as a useful reminder of the dangers of starting work prior to the finalisation of written terms between contracting parties, and of anticipating that such terms will quickly be agreed once that activity has started.
  • Second, it underlines the need for clarity of communication where there are exchanges of terms (or drafts of terms) where multiple contracts are being negotiated or where – as here – the parties have decided to use an interim arrangement to govern their relationship.

Third, there appears in this case to have been at least one instance where neither party had a record of enclosures to a letter, and disagreement as to whether certain enclosures in fact belonged with certain letters. Where multiple sets of terms are being exchanged, it is obviously critical to keep a complete and accurate record – particularly if work has already started.

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