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Interim contracts and limits on liability

06.02.2019 Energy & infrastructure

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Partner

David Choy

David Choy Senior Associate

In a decision that will be welcomed by construction contractors, the Court of Appeal has overturned an earlier TCC decision and found that a cap on liability had been incorporated into an interim contract between the parties that would be superseded by a final contract once agreed: Arcadis Consulting (UK) Ltd (formerly Hyder Consulting (UK) Ltd) v AMEC (BCS) Limited (formerly CV Buchan Limited) [2018] EWCA Civ 2222.

This case concerned a construction project in which the respondent, Buchan (now AMEC), engaged the appellant, Hyder (now Arcadis), to carry out design works in relation to the Castlepoint Car Park project (in anticipation of a wider agreement between the parties). It was envisaged that there would be a “Protocol Agreement” or framework agreement setting out the main terms, with individual project requirements being set out in schedules to the Protocol Agreement and in work instructions. As well as the Castlepoint Car Park project, the parties were also negotiating the terms for a separate project, the Wellcome Building.

In relation to the Wellcome Building project, Buchan sent an email to Hyder in November 2001 attaching terms (the “November Terms”). These included a limit on Hyder’s liability. A further set of terms were circulated in January 2002 (the “January Terms”). These also included a limit on Hyder’s liability.

Buchan sent Hyder a letter on 06 March 2002, instructing Hyder to start work on the Castlepoint Car Park project and stated that the work was “ … 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 was sent to Hyder on 06 March 2002 attaching various schedules (the “March Terms”), which also included a limit on Hyder’s liability. Hyder commenced work designing the concrete structures for the Castlepoint Car Park.

Although negotiations continued, the final terms of the Protocol Agreement were never signed. Buchan alleged that the Castlepoint Car Park was defective and claimed damages of £40 million against Hyder.  

The issues before the court at first instance were: i) whether or not the parties had entered into a legally binding contract in connection with the design of the car park; and ii) whether the parties had agreed to cap the liability of Hyder.

The first instance judgment for this case was covered in our February 2017 Smart Contracting Bulletin. On the first issue, Coulson J found that there was a simple contract between the parties, based on the fact that there was a letter of intent (the first letter of instruction on 06 March 2002) and this was accepted by letters from Hyder later that month; evidence of the acceptance was that the work was undertaken.

On the second issue, the judge found that despite a limit on Hyder’s liability being included in all three sets of terms, in the absence of any agreement on the overarching terms and conditions, the parties could not be taken to have agreed that Hyder’s liability in respect of the Castlepoint Car Park was to be capped. The judge stressed that clear words are required to cut down the remedies which the law provides for breach of important contractual obligations and no such clear words featured in the contract in question (the letter of intent).

Hyder appealed to the Court of Appeal on the second issue arguing that the reference to the terms and conditions that the parties were “working under” was a clear reference to the November Terms – which the parties had agreed would govern the Wellcome Building project and were, accordingly, incorporated into the contract for the Castlepoint Car Park project. Hyder also argued that the November Terms could not have been superseded by the March Terms because they were never agreed.

Buchan argued that the reference to “working under” was a reference to terms that parties were “working on”, that is to say negotiating. Buchan also argued that the November Terms were insufficient in themselves to be incorporated by reference into any agreement as the “parties had failed to objectively agree upon terms with the requisite preciseness” and, in any case, the November Terms had been superseded by that point.

The Court of Appeal agreed with Hyder and held that the cap on liability from the November Terms applied. The Court of Appeal stressed that Coulson J had failed to recognise that there was a distinction between the interim contract (which was to govern the projects until the final terms of the Protocol were agreed) and the final contract, which was to reflect the final agreed terms and which would then supersede the terms of the interim contract.

Dame Gloster summarised the reasoning for this approach:

“This view also aligns with commercial common sense. It would not make commercial sense that, while work was ongoing and the Final Contract was being negotiated, every new version of the terms and conditions sent between the parties would automatically supersede the original November Terms being worked under, unless the parties explicitly stated the same”.

Bearing in mind that every set of terms included some form or limit on liability – and, as recognised by Coulson J at first instance, it would be an “extraordinary result” for Hyder to have assumed an unlimited liability - Hyder’s liability to Buchan was accordingly capped.

This case serves as a useful reminder of the difficulties that can arise when communications between the parties are not clear not only about the status of the contract but also the precise terms that are to apply to the contract. Although the Court of Appeal held that Hyder’s liability was limited based on the facts of this case (and most notably the inclusion of limitation of liability provisions in the various versions of the terms), parties that are entering into a contract with the intention of limiting their liability should ensure that such terms are clearly incorporated.

Article authors:

Chris Kidd David Choy