UK: Court Of Appeal Finds Interim Contract Incorporated Terms And Conditions Including Limitation Of Liability

Last Updated: 30 January 2019
Article by Herbert Smith Freehills

In a recent judgment, the Court of Appeal has overturned a High Court decision which found that the defendant had undertaken preliminary work for a building project under an interim contract which did not incorporate any terms and conditions. The Court of Appeal found that terms and conditions had in fact been incorporated by reference, so that the defendant's liability was limited: Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd [2018] EWCA Civ 2222.

The decision suggests that (whilst there are clearly risks in commencing work without a clear written agreement as to the terms that will apply on an interim basis) the court may be reluctant to conclude that a party has assumed an unlimited liability for works carried out under an interim contract pending negotiation of a final agreement, when it never would have assumed such liability under that final agreement. Each case will, however, turn on its facts and parties would be well advised to ensure there is no room for argument as to the terms that apply at any stage.

Background

The claimant (AMEC (BCS) Ltd) was a contractor specialising in the design, manufacture and installation of pre-cast concrete for the civil engineering and construction industries. It engaged the defendant (Arcadis Consulting (UK) Ltd) to carry out certain works in connection with two large projects, the Wellcome Building and the Castlepoint Car Park, in anticipation of a wider agreement between the parties which did not ultimately materialise.

It is alleged that the Castlepoint Car Park is defective and that the claimant has suffered significant losses as a result of this. The defendant denies liability for the defects. The defendant brought proceedings in 2015 seeking a declaration as to the effect of a contractual liability cap it relies upon.

There was a dispute as to the terms on which the defendant carried out the works, in the absence of a formal written agreement which was still being negotiated at the relevant time, and in particular whether those terms incorporated a cap on the defendant's liability. The relevant correspondence included:

  • 8 November 2001: Claimant's email to defendant attaching updated terms and conditions and protocol documents. The email stated: "We intend to use the documents for the Wellcome Building works subject to your agreement and we will be providing more details shortly." The terms and conditions contained a limit of liability defined as the lesser of the reasonable direct costs of repair, renewal and/or reinstatement of the sub-contract works (to the extent the claimant became liable for them) and the sum stated in a schedule, which was left blank.
  • 13 November 2001: Claimant's letter to defendant instructing it to start work on the Wellcome Centre. This stated that the work done would be on the basis of the terms and conditions "in your possession at present" but that, once the agreements were finalised and executed, they would supersede that letter and govern any work done retrospectively.
  • November 2001 to March 2002: Various correspondence regarding the Castlepoint Car Park and the terms on which the defendant was prepared to provide its services, as well as the terms which applied to the Wellcome Building works. No agreement was reached in this correspondence.
  • 6 March 2002: Claimant to defendant instructing it to commence work on the Castlepoint Car Park project. This stated: "Your work is to be carried out in accordance to the Protocol Agreement and Terms and Conditions associated that we are currently working under with yourselves..." Again, it stated that once the agreement was executed it would supersede the letter and govern any work retrospectively.
  • 6 March 2002 (2nd letter): Claimant to defendant attaching the "Protocol Agreement, Terms and Conditions, Contract Schedules and Instructions documents" that it said should apply.

The High Court (Coulson J) found that there was a "simple contract" between the parties. This was on the basis of the claimant's first letter of 6 March 2002, which he found the defendant had accepted by means of letters dated 8 and/or 22 March, though acceptance was best evidenced by its conduct in undertaking the work rather than the correspondence. The judge found that the parties agreed that the defendant would undertake the work and be paid for it, but that the contract did not incorporate any set of terms and conditions, as no terms had been accepted by the defendant – which, importantly, meant that the defendant's liability was uncapped.

The defendant appealed.

Decision

The Court of Appeal allowed the appeal (Dame Elizabeth Gloster giving the lead judgment, with which Holroyde and Underhill LJJ agreed). It agreed with the judge that there was a contract, but found that it did incorporate terms and conditions including a liability cap.

On the Court of Appeal's analysis, the claimant's first letter of 6 March 2002 was a standing offer which, if accepted, would result in a binding contract, and it was accepted by the defendant's letters of 8 or 22 March, as evidenced by the defendant undertaking the work. The judge was therefore correct to find this created a binding contract.

As there was no evidence of a rejection of any of the terms or a counter-offer, that meant the defendant accepted all of the terms of the 6 March letter. That included the term that the work was to be carried out in accordance with the terms and conditions the parties were "currently working under". The court was therefore bound to determine what, if any, terms and conditions had been incorporated.

One of the problems with the judge's analysis was that he failed to distinguish between the interim contract, which the parties were working under, and the final contract, which would supersede the interim contract once agreed. Even though the parties had not reached a concluded agreement on the final terms and conditions, they did agree to the interim terms which would apply pending that agreement.

On its proper construction, the court found, the reference to the terms and conditions the parties were working under was a reference to the 8 November terms. On the facts, none of the correspondence and negotiations thereafter superseded those terms, as none were agreed. Those terms were incorporated by reference into the contract between the parties. As a result, Arcadis's liability for defective design (if any) was limited to the reasonable direct costs of repair.

The Court of Appeal noted that the judge had reached his conclusion that no terms and conditions were incorporated despite recognising the particularly harsh consequence for the defendant in assuming unlimited liability "despite the fact that every set of proposed terms and conditions included some sort of provision that limited its liability (albeit in radically different terms)". The harshness of the result was, the court said, another reason why the judge should have reached a different conclusion.

The court referred to British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504, in which Goff J stated that, 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. The judge's conclusion in the present case was, the court said, what Goff J called an "extraordinary result," in that it meant the defendant assumed an unlimited liability for its contractual performance, when it never would have assumed such liability under any contract which it entered into.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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