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The dangers of commencing work against a letter of intent: £300k fee, £40m liability

23.02.2017 Energy & infrastructure

A recent case has illustrated the danger of commencing work on a project without a comprehensive contract in place (Arcadis Consulting (UK) Ltd (formerly called Hyder Consulting (UK) Ltd) v AMEC (BSC) Ltd (formerly called CV Buchan Ltd) [2016] EWHC 2509 (TCC)). 

In 2001/2, Buchan (now AMEC) and Hyder (now Arcadis) had discussions for Hyder to provide concrete structure design services on a number of projects. It was envisaged that there would be a “Protocol” or framework agreement setting out the main terms, with individual project requirements being set out in schedules to the Protocol and in work instructions. The discussions referred to a cap on Hyder's liability "where liability is not covered by insurance" and documents proposed by Buchan contemplated a requirement for Hyder to have professional indemnity insurance to a value of £5m per project. Hyder argued that other documents envisaged a liability cap of just £610,515. The terms of the Protocol were never actually agreed, but after receiving a letter of intent from Buchan containing key commercial terms, Hyder commenced work designing concrete structures for a multi-storey car park.  The car park as built was defective and may now need to be demolished and rebuilt. 

The court did not consider whether Hyder’s work was in fact defective, rather it focused on the issue of whether Hyder’s liability was limited by the terms of any contract between the parties. 

The court held that there was a contract between Buchan and Hyder. Dismissing Buchan’s argument on this point, the judge emphasized that “[in] circumstances where works have been carried out, it will usually be implausible to argue that there was no contract”. The fact that there was a letter of intent and that none of the documents had been flagged ‘subject to contract’ also pointed clearly to the existence of a contract for the design work. 

However, although a series of documents exchanged between the parties around the time the letter of intent was issued showed that both parties anticipated a final contract which would limit Hyder’s liability, the judge found that Hyder had not accepted the terms of any of the various proposals made by Buchan, so could not rely on any of the limitation provisions in those proposals. The judge commented that “Whilst the court should always strive to find a concluded contract in circumstances where work has been performed …, the court is not entitled to rewrite history so as to incorporate into that contract express terms which were not the subject of clear and binding agreement.” 

The judge also made reference to the principle of contract construction that clear words are required to cut down the remedies which the law provides for breach of important contractual obligations.  No such clear words featured in the contract in question.  

As the simple contract between the parties was on the terms stated in Buchan’s letter of intent, which did not include any reference to limits on Hyder’s liability, that liability was unlimited. Hyder now faces a potential liability of around £40m for alleged defective design work (having been paid less than £300,000 for the work in 2002).

Given that both parties clearly anticipated that Hyder’s liability would be limited when the Protocol was agreed, the court acknowledged that this might be regarded as a harsh result for Hyder, but criticised Hyder’s “dilatory and often uncooperative approach” to the negotiation of the Protocol. The judgment emphasised 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.”