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The Dangers of Letters of Intent

April 2017 - Issue 92

The Technology and Construction Court matter of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] EWCH 2509 (TCC), is a case which highlights the perils of proceeding without a formal contract in place or an agreement in relation to a cap on a contracting party’s liability.

Applying the principles laid down in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG (UK Production) [2010] UKSC 14, Coulson J held in Arcadis that the parties entered into a binding, simple contract based on a letter of intent, but that there was no cap on Arcadis’ liability.

Summary

The Claimant (Arcadis, previously known as Hyder) applied for declaratory relief in relation to the formation of a contract and argued that it included a limitation of liability clause which capped its financial liability in respect of defective design. The Defendant (AMEC, previously known as Buchan) claimed that the parties’ relationship was governed by letters of intent and that, if there was a contract between the parties, it did not incorporate a cap of Hyder’s liability.

Background Facts

Hyder was engaged by Buchan to provide structural engineering design services in relation to a number of large construction projects in anticipation of a wider overarching agreement between the parties. One of the projects was a large precast concrete carpark in Castlepoint Shopping Centre in Bournemouth.

Following completion of Hyder’s services in relation to the car park, it was alleged that serious defects had arisen which may require the car park to be demolished. Hyder sought a declaration  that its liability to Buchan for defective design was capped at £610,515.00 pursuant to its contractual terms of appointment.

Buchan contended that on a trust construction of the documents, even if there was a contract of appointment, there was no limit on Hyder’s liability to Buchan for its defective design because 1) the parties had not reached an unequivocal agreement as to the contract terms and conditions and 2) the terms and conditions and schedules, which contained the limitation of liability clause, had not been effectively incorporated into Hyder’s contract of appointment.

The dispute required resolution of two key issues. First, whether or not the parties had entered into a legally binding contract in connection with the car park and secondly, whether or not the parties had agreed a limitation of Hyder’s liability to Buchan.

The Judgment

The Court held that there was a simple, binding contract between the parties based upon a letter of intent, however, there was no cap on Hyder’s liability.

The simple contract was based upon an offer to carry out the work, and the acceptance of a price for that work. Whilst the parties had negotiated upon draft terms and conditions, there was no express and clear agreement to any of the versions. Therefore, whilst the letter of intent referred to terms and conditions which the parties were “working under”, this was held to be a “general reference to the terms which were still being negotiated”. 

Comment

Despite the fact that each draft version of the terms and conditions included a limit on Hyder’s liability for defective design (albeit a different cap in each case) the Court held that there was no cap on Hyder’s liability.

This case demonstrates that parties should actively engage to reach a clear agreement in writing on important contractual terms such as limitation of liability provisions before proceeding. If the parties commence work on the basis of a letter of intent or simple contracts and fail to agree an applicable cap on liability, a court may conclude that there is a contract between the parties, but that it does not contain any cap on their liability (as was the case here). 

Anna Mulholland

Trainee Solicitor

e amulholland@prettys.co.uk

t 01473 298218

 

 

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