The latest guidance from the Court of Appeal on letters of intent

Arcadis Consulting (formerly Hyder Consulting) v AMEC (BCS) (formerly CV Buchan) [2018] EWCA Civ 2222

The case of Arcadis Consulting (formerly Hyder Consulting) v AMEC (BCS) (formerly CV Buchan) [2018] EWCA Civ 2222 serves as a reminder of the potential implications of not finalising contracts prior to undertaking works.

The Court of Appeal held that, despite not being formally entered into, a set of terms and conditions had been incorporated into a letter of intent between the parties in anticipation of a protocol agreement being finalised. This is a reversal of the High Court decision that no such terms and conditions were incorporated.

Background

CV Buchan (Buchan) was engaged as a concrete sub-contractor on a car park. Hyder Consulting (Hyder) carried out structural design works at the request of Buchan, but the parties never entered into a full agreement in respect of this work.

On 8 November 2001, Buchan sent Hyder a draft set of terms and conditions, which included a limitation of liability to the lesser of (a) "the reasonable direct costs of repair […]"; or (b) "the sum stated in Schedule 1". Schedule 1 contained a placeholder for a liability cap amount. Between 8 November and 6 March, an exchange of correspondence took place, in which the parties negotiated various iterations of terms and conditions.

On 6 March 2002, Buchan sent an email instructing Hyder to carry out work, followed by a separate email containing revised terms and conditions. In this version, the previously blank space in Schedule 1 contained a figure of £610,515. This revised set of terms and conditions was also not expressly accepted by Hyder, but Hyder proceeded to commence work on the project.

Buchan sought £40 million in damages from Hyder, for alleged defects in the car park. Hyder denied liability for the defects but sought a declaration from the court that a contract existed between the two parties, despite the absence of a signed formal protocol agreement, and that this contract contained a term capping its liability at £610,515.

High Court decision

Coulson J in the High Court took the two key questions of the case in turn: firstly, whether a contract could be said to exist between the parties, and secondly, if a contract did exist, what terms it incorporated, and therefore whether Hyder's liability was capped.

Was there a contract between Hyder and Buchan?

The High Court found that a "binding, simple contract" did exist between the two parties, rejecting Buchan's argument that the absence of a signed formal protocol agreement, as originally envisaged by the parties, meant a contract could not exist. More so than the correspondence between the parties, "Hyder's conduct in undertaking the work" was deemed the best evidence that the instruction was accepted, and therefore that a contract was formed.

What were the terms of this contract, and did they include the limit of liability?

Coulson J rejected Hyder's arguments that any iteration of the terms and conditions proposed in correspondence between the two parties was incorporated into the simple contract. The 8 November 2001 terms of conditions were superseded by further negotiation between the parties, and no further terms and conditions were accepted. The liability cap figure entered in the 6 March 2002 terms and conditions was not expressly agreed between the parties. The simple contract merely comprised Buchan's letter of intent in the first 6 March 2002 email (without terms and conditions attached), accepted by "Hyder's conduct in getting on with the work". The effect of this was that Hyder had unlimited liability, as the neither the term limiting liability nor the £610,515 cap to which it referred formed part of the contract.

Court of Appeal decision

The Court of Appeal overturned the High Court's decision. Whilst it agreed with Coulson J that there was a contract between the parties, it held that the contract did in fact incorporate the liability cap contained in the November terms and conditions.

The Court of Appeal found that the parties had agreed the November terms and conditions, and cited conduct and correspondence in November and December from Hyder in which they confirmed that they were working under those terms and conditions.

The letter of intent and the formal protocol agreement were distinguished from one another, and although the final contract's terms and conditions had not been agreed between the parties, this did not preclude terms being agreed for work carried out under the letter of intent. Furthermore, subsequent correspondence did not supersede the terms of the letter of intent, as it simply proposed changes to terms of the protocol agreement, which had not been finalised.

Therefore it followed that Hyder could rely on the limitation of liability in the November terms and conditions. The Court of Appeal held that Hyder's liability was limited under condition 2A (a) of the November terms and conditions to the "reasonable direct costs of repair […]". It is clear from the judgment that in this appeal, Hyder was no longer seeking to rely on the £610,515 cap.

Comments

From a practical perspective, this case highlights the importance of having a final agreement in place before proceeding with work. There needs to be clear communication and clarity where terms are being exchanged between parties, and where numerous agreements are being simultaneously negotiated. This case demonstrates the need for scrutiny on the part of both parties when it comes to letters of intent and highlights that it is generally safer to enter into a full contract, making sure it contains all the negotiated terms.

Chloe Szczerbiak and Sean Wyer