Construction site in Dubai at sunsetStarting work on a construction project before contract terms were agreed nearly exposed a design consultancy to a £40 million liability claim.

Arcadis Consulting was hired by concrete sub-contractor AMEC to undertake design work on two projects , the Wellcome Centre and Castlepoint car park.  The companies intended to work together on both projects under the terms of a protocol agreement.

Before the terms of the protocol agreement were finalised Arcadis started work on the Castlepoint car park on the strength of a letter of intent. Their letter of instruction referred to “the terms and conditions we are currently working under with yourselves”.

The letter of intent was sent in an email, along with the draft protocol agreement, schedules to the agreement and terms and conditions.

During the work on the car park there was a dispute with AMEC claiming Arcadis’ work was defective.  The dispute resulted in a case being brought in the High Court.

Arcadis denied liability for the defective work, but argued that even if it was at fault, its liability was limited to £610,515, as set out in the draft terms and conditions.

In the High Court, the judge disagreed.  He concluded that as the protocol agreement had not been finalised Arcadis’ work on the car park was under a ‘simple contact’ which excluded the terms and conditions, including the liability cap of £610,515.  As a result, Arcadis faced a potential loss of £40 million.

Arcadis took the case to The Court of Appeal which overturned the High Court’s decision.  It ruled that Arcadis had contracted with AMEC on the basis of the draft terms and conditions.  As a result, it could rely on the liability cap.

The appeal court judge said that the High Court’s decision would have led to an extraordinary result where Arcadis would have “assumed an unlimited liability for its contractual performance, when it never would have assumed such liability under any contract which it entered into.’

James Burgoyne, Director – Claims & Technical, Brunel Professions said “It is common for construction professionals to start work on projects whilst the final contractual details are still being negotiated.  But this case shows how important it is for professionals to make sure that there is an agreement on the key terms and conditions at the outset, so that they are not taking on large unintended liabilities.”

“This case turned on its facts, and the specific language used in the letter of intent. As it is often the case that the contract proposed contains onerous terms which the professional is hoping to subsequently amend, letters of intent should be carefully checked to ensure that such terms are not treated as incorporated in the interim appointment.”

Reports on the case have been published by Thomson Reuters Construction Blog, Hardwicke and Out-Law.

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