Six letters that spell disaster

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Here’s a case involving Arup and a power station in the Philippines – and it demonstrates the kind of damage one man can do in five seconds armed only with a biro

If, during contract negotiations, someone gives you a form containing proposals for contract terms, and you write the word “okay” at the end, and initial it, what exactly have you done? Depends what is in the proposal form, you reply. In December 2003 we had the case of Ove Arup & Partners International Limited vs Mirant

Asia-Pacific Construction (Hong Kong) Limited. Here the proposal form made reference to a separate agreement “entered into” between the parties, whereas it appeared that no such agreement existed.

How do the courts try to give meaning to what the parties have done?

It is astonishing how many construction disputes still depend upon the good old legal concepts of offer, acceptance and incorporation of contract terms. The above case is significant, because it is a decision of the Court of Appeal and therefore binds judges of the Technology and Construction Court. The judgment was, in fact, given by a distinguished construction specialist, Lord Justice May.

The case concerned the construction of a power station at Sual in the Philippines. Arup was engaged for the engineering design, including the design of boiler foundations. It started this work on a letter of intent pending discussion of the contract terms. Arup pressed for the FIDC model services agreement, including a £4m cap on liability, and a five-year limitation period.

However, by March 1996 (yes, the negotiations started that long ago), no agreement had been reached. At that point, the employer, CEPAS, decided to engage Arup for a second area of work, namely ground investigation. Arup sent CEPAS its proposals for this work. Clause one of the proposals provided that it would be governed by “the model services agreement (the main agreement) entered into by [CEPAS and Arup]”. A CEPAS manager, Mr Elliott, received a proposal form, wrote “okay” on it, initialled the last page and then sent it back.

It is astonishing how many disputes depend on good old concepts of offer, acceptance and incorporation of terms

Did this mean (as Arup contended) that the ground investigation work was to be governed by the FIDIC terms, including the limitation clauses? Or, as CEPAS argued, since no agreement had been entered into for the main works, was the signature and the “okay” meaningless, signifying only an “agreement to agree”?

The court began by reiterating some well known principles. One of these is that a contract can come into being even if all terms have not been agreed, so long as the remaining discussions can be seen as merely “sorting out details”. Another is that the court must approach the matter objectively, and not be influenced by what a witness says he meant.

The court decided that the parties meant that the ground investigation works were to be governed by the FIDIC terms, including the limitation clauses. The parties must have had the FIDIC terms in mind – what else could they have been considering? The words “entered into” thus had to be read as “proposed to be entered into”. The fact that this conclusion meant the main contract and the ground investigation works would potentially be on different terms was odd, but not uncommercial.

The court also said something interesting about evidence. Witnesses cannot usually say what they understand the terms of an agreement to be (since the court looks at things objectively). But the court said that a person might be allowed to give evidence as to whether he thought he had entered into an agreement at all, and for that purpose the court could also look at internal documents (in this case, Arup’s).

But the court’s decision was not entirely in Arup’s favour. Arup had also argued that