Legal

Arcadis v Amec: Letters of intent

8 January 2019 | By Christopher Reeves

The court of appeal’s decision to reverse a high court ruling on a liability cap demonstrates why letters of intent need clarity, says Christopher Reeves.

Christopher Reeves

“Letters of intent” are used as an interim measure, which can allow work to start on a project, until the final contract is agreed. They usually refer to a “cap”, the idea being to limit the amount of work done. The common way of doing this is to set a maximum amount the contractor is paid but the scope of work is often ill defined. 

In this court of appeal case, the cap was on liability for design work Hyder (later bought by Arcadis) carried out for CV Buchan (an Amec subsidiary) on the 3,000-space Castlepoint car park in Bournemouth, which was built back in 2003.

But it was found to be defective only two years later. Amec settled a claim with the main contractor Kier and then claimed £40m from Hyder to cover rectification costs.

Arcadis argued that any claim was limited to a cap on liability of £610,515. The cap was mentioned in a “draft protocol agreement” and terms and conditions. The protocol was intended to cover work on another project, not just Castlepoint.

Proposed changes to liability cap

On receiving its own letter of intent from Kier, Amec instructed Hyder to commence design and detailing work, its letter saying: “Your 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.”

A second letter the same day and subsequent communications proposed changes to the cap on liability, but no protocol was ever signed.

The case finally made it to the Technology and Construction Court in 2016, when Mr Justice Coulson decided that while there was an “interim contract”, the terms and conditions were not in play. But he decided the parties had not formally agreed that liability for Castlepoint was capped at £610,515, nor set any terms and conditions.

When Arcadis took the case to the court of appeal, the key question was what terms and conditions the parties were working under.

The Castlepoint car park in Bournemouth has used temporary supports since the problems emerged

The court decided that the earlier judgement had failed to distinguish between the interim contract under which the parties were currently working and the final contract, the terms of which would supersede the interim contract once agreed. It said: “The court has to consider what was communicated between the parties by words or conduct and decide whether that leads objectively to the conclusion that they had agreed upon all the terms.”

While the law requires a final and unqualified expression of assent, the appeal court felt Amec did not have to mention specific parts in its acceptance to indicate it agreed with all the terms. In this case, the appeal court decided there was no evidence of a rejection of any of the terms or a counter-offer.

Once the judge in the lower court had found there was acceptance by conduct – the interim contract – it followed that Amec unequivocally accepted all the terms.

No responsibility inferred

Arcadis thought the lower court decision appeared “harsh”. The court of appeal agreed, saying: “If parties are in a stage of negotiation and one party [Amec] asks the other to begin work, ‘pending’ the parties entering into a formal contract, it cannot be inferred from the other party [Hyder] acting on that request that he is assuming any responsibility for his performance, except such responsibility as will be assumed under the terms of the contract that both parties are confident will be shortly finalised.”

The court of appeal said it would be an “extraordinary result” if, by acting on Amec’s request, Hyder assumed an unlimited liability for its contractual performance, when the parties had specifically agreed a limit of liability in relation to the interim contract. It reversed the original decision.

If letters of intent are to be used, then they must be clear on what terms and conditions apply in the interim period. If a cap on payment or liability is to apply, then that needs to be spelt out and ensuing conduct or correspondence needs to be consistent with that. If the final contract terms are likely to depart from the “interim contract” then this should be indicated from the outset.

Christopher Reeves is a construction lawyer and founder of Mediation for Construction

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