The Dangers of Letters of Intent

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The Dangers of Letters of Intent

Published 14 February 2017

The Technology and Construction Court matter of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] EWHC 2509 (TCC), is another case which warns parties of the perils of proceeding without a formal contract in place or an agreement in relation to a cap on a contracting party's liability.

Applying the principles laid down in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG (UK Production) [2010] UKSC 14, Coulson J held that the parties entered into a binding, simple contract based on a letter of intent, but that there was no cap on Arcadis' liability.

Executive Summary

The Claimant (Arcadis previously known as "Hyder") applied for declaratory relief in relation to the formation of a contract and argued that it included a limitation of liability clause which capped its liability in respect of defective design. The Defendant (previously known as "Buchan") averred that the parties’ relationship was governed by letters of intent and that, if there was a contract between the parties, it did not incorporate a cap on Hyder's liability.

Background Facts

Hyder was engaged by Buchan to provide structural engineering design services in relation a number of large construction projects in anticipation of a wider overarching agreement between the parties. One of the projects was a large precast concrete carpark at Castlepoint Shopping Centre in Bournemouth (the "Car Park").

Following completion of Hyder's services in relation to the Car Park, it is alleged that serious defects have arisen which may require the Car Park to be demolished. Hyder sought a declaration in these proceedings that its liability to Buchan for defective design was capped at £610,515 pursuant to its contractual terms of appointment.

Hyder asserted that there was a contract in existence, which incorporated terms and conditions and schedules that in effect, capped its liability at £610,515. Buchan contended that on a true construction of the documents, even if there was a contract of appointment, there was no limit on Hyder’s liability to Buchan for its defective design because 1) the parties had not reached an unequivocal agreement as to the contract terms and conditions and 2) the terms and conditions and schedules, which contained the limitation of liability clause, had not been effectively incorporated into Hyder's contract of appointment (if any).

The dispute required resolution of two key issues. First, whether or not the parties had entered into a legally binding contract in connection with the Car Park and secondly, whether the parties had agreed a limitation of Hyder's liability to Buchan.

The Judgment

The Court held that there was a simple, binding contract between the parties based upon a letter of intent, however, there was no cap on Hyder's liability.

The simple contract was based upon an offer to carry out the work, and the acceptance of a price for that work. The parties had negotiated upon draft terms and conditions and schedules however, there was no express and clear agreement to any of the versions tabled by the parties. Therefore, whilst the letter of intent referred to terms and conditions which the parties were "working under", this was held to be a "general reference to the terms which were still being negotiated" .

Comment

Despite the fact that each draft version of the terms and conditions included a limit on Hyder's liability for defective design, albeit different, the Court held that there was no cap on Hyder's liability.

This case demonstrates that parties should actively engage to reach a clear agreement in writing on important contractual terms such as limitation of liability provisions before proceeding. If the parties commence work on the basis of a letter of intent or simple contracts and fail to agree an applicable cap on liability, a court may conclude that there is a contract between the parties, but that it does not contain any cap on their liability.

DAC Beachcroft LLP acted for the successful Defendant in this matter.

Authors

Mark Roach

Mark Roach

London - Walbrook

+44 (0)20 7894 6314

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