Construction Company Owners – Beware Complicated Contracts

Construction Company Owners – Beware Complicated Contracts

18th December 2018

A recent case in the Court of Appeal serves to remind us just how important it is for contractors to get the contract signed by all parties before work begins.  The case of Arcadis Consulting vs. Amec is a sorry tale.

Back in 2001, Amec, as the specialist contractor on two large construction projects engaged Arcadis to carry out some design works on both jobs in anticipation that a “Protocol Agreement” would follow governing all of the work carried out by Arcadis.  Before the Protocol Agreement was finalised, Arcadis began work on one of the projects (the Castlepoint Car Park) under a letter of instruction referring to the ongoing negotiations.  However, the Protocol Agreement was never finalised.

Eventually, the Castlepoint carpark in Bournemouth, was alleged to be defective and liable to be demolished and rebuilt.  The claim was put at £40 million and Amec, having already settled with its main contractor, Kier, turned to Arcadis.  Arcadis denied liability, but argued that if it were liable, there was a simple contract covering its design works and this contract included a cap of £610,000on its liability.

Amec then argued that the parties’ correspondence showed that both were planning to enter into a formal protocol agreement that would contain the terms and conditions.  However, the protocol agreement never materialised so Amec claimed there was no contractual relationship.   The letter of instruction, however, referred to “the terms and conditions we are currently working under with yourselves”.  According to the judge, Arcadis performed the works in the view that if the Protocol Agreement did not materialise, the correspondence would act as a contractual right for payment.  However, when all parties exchanged three sets of Terms and Conditions, all of which limited Arcadis’ liability, no final agreement had been reached, meaning there was no limitation provision on which Arcadis could rely.

The work was carried out by Arcadis and paid for by Amec, so the judge deemed that there was a binding simple contract between the parties formed on the basis of their prior correspondence.  When trying to ascertain which documents had been incorporated into this contract, there were three separate forms of terms and conditions, each with a different liability cap.  This resulted in the judge determining that there was too much uncertainty to say that the parties had agreed to be bound by a liability cap.  For Arcadis, this meant that there was no limit of liability, and the judge stated that this was an inevitable result of the uncooperative approach Arcadis showed towards the negotiations, leaving Arcadis facing a potential loss of £40 million!

When the case reached the Court of Appeal in October, the key issue was whether the terms and conditions sent by to Arcadis on 8 November 2001 were incorporated into the contract.  These “November” terms included the clause limiting Arcadis’ liability to £610,000.  The judge relied on a letter from Amec to Arcadis which stated that it “recognises that the first project will be done to the terms and conditions and instruction provided to you on 13 November 2001”.   Finding in Arcadis’ favour, the original judgement was reversed in a landmark ruling, sparing Arcadis from liability.

This sorry story demonstrates clearly just how essential it is that work does not begin until contracts are finalised.  This was a complicated case, involving large companies.  However, with so many large projects nowadays requiring the collaboration of several building companies and contracts becoming more complicated, this is an issue that the owner of every construction company, no matter how large or small, should be aware of.