There is much to do at the outset of any construction project. Having chosen the team and agreed specifications, everyone is keen to make progress and deliver a fantastic end-product. In that whirlwind on initial activity, it is easier to forget to formalise contractual terms. After all, everyone is focussed on future success and allocating legal risks and responsibilities can be far from the mind.
But is a lack of clarity on contractual terms likely to have any meaningful impact? There is little doubt that many construction projects are carried out successfully every year without any formal contract in place and the respective parties may suffer no ill effects from that approach. One project where this was not the case was Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd.
AMEC was a concrete sub-contractor for two significant construction projects and it engaged Arcadis as a designer to assist in delivering the package. The parties intended to enter into a protocol agreement to govern their relationship, but this was never finalised. Instead, the parties exchanged correspondence including a letter of instruction.
One of the projects, a car park, was alleged to have defective design that would require an expensive demolition and re-build. AMEC settled a claim brought by the main contractor and then sought £40 million from Arcadis. The heart of Arcadis’ defence was the assertion that their liability was limited to £610,515.
What was disputed?
The parties did not agree on the documents that constituted the contract between them and, crucially, whether the cap on liability had been incorporated into the agreed terms. There were numerous letters and emails exchanged between Arcadis and AMEC relating to the scope of services to be provided by Arcadis and the relevant terms of contract. The uncertainty was not helped by the record keeping of the respective parties, with the Court being unable, in some cases, to determine which documents had been sent between the parties and at what time. The terms of the contract, and the incorporation of the cap on liability meant that £39.5 million was in dispute.
The first instance decision
In the TCC first instance decision, Justice Coulson determined that the various sets of terms and conditions exchanged between the parties were not incorporated into the contract. He said that there was no evidence that Arcadis agreed to those terms and it had not used the word “accept” in its correspondence. The judge rejected Arcadis’ request for a declaration that it could rely on the cap on liability.
The first instance decision left Arcadis facing a disastrous commercial position and an appeal was made. The Court of Appeal came to a different conclusion to the TCC, saying that the judge had erred in determining that the cap on liability did not apply and that too much weight had been placed of the absence of “accept” in the correspondence. The cap on liability did therefore form part of the contract and Arcadis could rely upon it.
Best practice following the decision
The judgment set out a full analysis of why, based on the specific facts of the case, the original decision was overturned but the fact that such a considerable sum of money was at stake and that it took a Court of Appeal decision to reach a conclusion should provide a stark warning to those involved in construction projects.
Construction contracts advisers looking at the decision will identify three key areas of best practice that could have avoided ears of expensive litigation.
- Agree, finalise, sign and date contracts at the earliest opportunity. A lack of clarity helps neither party, and the need to make quick site progress shouldn’t shift attention away from concluding important legal documents.
- Letters of intent or letters of instruction should be used sparingly and should relate only to clearly defined scopes of works or services. If such letters need to be extended, have the parties invested sufficient effort in concluding final terms?
- Keep comprehensive records. High value commercial projects are always susceptible to disputes and claims. There is no substitute for archives of emails, hard copy documents sent with letters and attendance notes of telephone calls. At worse, they identify the context in which decisions are made; at best, they support your position and enable the Court to agree with you assertions.
It is far better for the construction team to agree the terms that they wish to work to than have judges do it for them.
Stuart Wilson is a Partner specialising in construction contracts.
Dan Hall is a Partner specialising in construction disputes.
9 January 2020
This Legal Update is published as a general guide only and it is not intended to contain definitive legal or professional advice, which should be obtained as appropriate in relation to any particular matter. This publication relates to matters prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.