Failing to execute a formal contract risks severe exposure in the face of a defects claim, warns Christopher Filor
A recent Court of Appeal case that was a close call for the successful appellant, Arcadis, reinforces the strong message that in all cases where work starts before a final contract is signed, it is extremely unwise to proceed without a full and detailed agreement in the hope that the law will subsequently come to the rescue by implying appropriate protections such as caps on liability.
The decision, Arcadis Consulting (UK) Ltd vs Amec (BSC) Ltd  EWCA Civ 2222, is a recent Court of Appeal decision following the Technology and Construction Court (TCC) hearing in October 2016. The case centred on the age-old problem of construction operations starting before the parties have concluded a definitive agreement on the terms of the contract.
In 2001, Amec (formerly known as Buchan) engaged Arcadis (formerly known as Hyder Consulting) to carry out certain design works for two large projects in anticipation of a wider umbrella agreement that in the end did not materialise.
One project, the Castlepoint car park in Bournemouth, was subsequently alleged to be defective and hence liable to be demolished and rebuilt. The claim was put at £40m. Amec, having settled with the main contractor, Kier, now turned its sights on Arcadis.
Arcadis denied liability, but in the alternative argued that if it were liable, then there was a simple contract concerning its design works which included a cap on its liability of £610,000.
Amec argued before Mr Justice Coulson (as he was then, but now Lord Justice Coulson) in the TCC hearing that the parties’ correspondence demonstrated both were planning to enter into a formal protocol agreement that would contain the terms and conditions. As the protocol agreement was never concluded, Amec asserted there was no contractual relationship.
However, since the work was actually carried out by Arcadis and paid for by Amec, the judge held that there was a binding simple contract between the parties formed on the basis of their correspondence. He then went on to consider which documents had been incorporated into this contract. This was no easy task as there were three competing formulations of the terms and conditions, each containing a liability cap.
Added to this conundrum Arcadis had never once indicated, verbally or in writing, that it accepted any of these proposed terms.
This led the judge to determine there was too much uncertainty to say that the parties had agreed to be bound by a liability cap.
The result was catastrophic for Arcadis as it meant there was no limit of liability. Acknowledging this harsh outcome, the judge remarked that it was the inevitable consequence of Arcadis’ dilatory and uncooperative approach to the negotiations, and he emphasised that it was always better for a party to reach full agreement, rather than to delay and then fail to reach any detailed agreement at all.
Turning to the Court of Appeal, the key question was whether the terms and conditions sent by Amec to Arcadis on 8 November 2001 (the “November terms”) were incorporated by reference into the simple contract.
The November terms included a clause proposing a limit on Arcadis’ liability of £610,000.
Lady Justice Gloster giving the lead judgment concluded that the November terms were incorporated by reference into the contract, as found by Lord Justice Rix in Tradigrain SA vs King Diamond Shipping SA  2 Lloyd’s Rep 318 at . In this case the judge had stated that “the first rule relating to the incorporation of one document’s terms into another is to construe the incorporating clause in order to decide on the width of incorporation”.
In support of incorporation of the November terms, Lady Justice Gloster relied on a letter from Amec to Arcadis dated 6 August 2002, which said: “Hyder letter of 12th December 2001 recognises that the [first project] will be done to the terms and conditions and instruction provided to you on 13 November 2001.”
Lady Justice Gloster followed Lord Justice Goff’s analysis in British Steel Corporation vs Cleveland Bridge & Engineering Co Ltd  1 All ER 504 and, on the basis of that analysis, she concluded: “If parties are in a stage of negotiation and one party asks the other to begin work ‘pending’ the parties entering into a formal contract, it cannot be inferred from the other party 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. It would be an extraordinary result if, by acting on such a request in such circumstances, the buyer were to assume an unlimited liability for his contractual performance, when he would never assume such liability under any contract which he entered into.”
Reflecting on the harshness of the TCC outcome for Arcadis, Lady Justice Gloster said Mr Justice Coulson had erred in concluding that no liability cap could be construed into the contract since this led to the “extraordinary result” referred to by Lord Justice Goff whereby Arcadis had been deemed to assume an unlimited liability that it would never have agreed to under any written contract.
Accordingly, Lady Justice Gloster allowed the appeal.