A recent case in the United Kingdom (Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd, [2018] EWCA 2222) highlights the dangers of performing work under a letter of intent without agreeing on major substantive terms and conditions.
A specialty concrete subcontractor on a couple of projects sought to have a structural design consultant work with it on each. The parties generally agreed on an arrangement under which services were to be performed on both projects and future projects on a going-forward basis. Various draft contracts were exchanged as they proceeded on work together under a letter of intent. Although the drafts contained provisions limiting, but not quantifying, the liability of the design consultant, the provisions were not uniform; and the letter of intent was silent on limitations of liability. The subcontractor instructed the consultant to commence work pending contract finalization, and the consultant commenced performance of the first project and then the second.
As happens in construction cases, claims of defects arose on the second project and the subcontractor sought to impose on the consultant damages amounting to some £40 million in the Technology and Construction Court. The consultant responded with a showing of the exchange of draft agreement mark-ups; each of which contained a provision for a limitation on the consultant’s exposure to claims of the subcontractor. The shortfall was that, in the draft agreements, the amount of the limitation was left blank. There was, however, an exchange of correspondence; one letter of which – on November 8, 2011 – suggested that the limit of the consultant’s liability under the attached proposed draft of the agreement was 10% of the subcontract package for insured losses (subsequent letters and draft agreements leaving the matter of liability limitation blank). Although not specifically referring to the letter three days earlier, the subcontractor’s letter of instruction dated November 13, 2011 provided that “…work done under this instruction is to be on the basis of…the conditions and terms detailed in the Protocol Agreement, Design Consultancy Terms and Conditions in your possession at present.”
The Court ruled in favor of the subcontractor. Finding that the parties were working under a “simple contract” addressing, effectively, only payment and performance, the trial judge concluded that the terms and conditions which the parties had been exchanging and negotiating were not fully accepted, definitized and incorporated into the agreement and that there was no limitation on the consultant’s liability.
On appeal, the Court of Appeal found that the subcontractor had, in addition to the letter of intent, directed the consultant to work under a set of “interim terms” pending finalization of the negotiated agreement between the parties. Although there was not agreement on a final contract, there was agreement on the interim agreement. The consultant proceeded under these terms, was paid pursuant to them, and subsequently confirmed them in writing, and the Court of Appeal found them to be the terms applicable to the work on the first project. The appellate court found that the document dated November 8, 2011, which was in the consultant’s possession at the time of the subcontractor’s letter of instruction of November 11th, incorporated the liability cap into the interim contract.
Subsequently, the subcontractor had directed the consultant to commence services for the second project on “the terms and conditions we are currently working under with yourselves.” Whereas the TCC judge had interpreted this to mean terms the parties were “working on” or negotiating, the Court of Appeal reversed and held that the words meant that the second project was to be governed by the same interim terms as the first project. The consultant was found to have accepted these terms by performance of its services on the second project, and by subsequent letter.
That there was subsequent correspondence between the parties modifying the draft final agreement did not supersede and modify the terms of the interim agreement, even though that was a form of the yet-finalized final agreement. The Court of Appeals found the interim agreement to be agreed upon and the subsequent continued negotiation applicable only to the final contract that had not then been agreed upon.
In making its ruling, the Court of Appeal found that the TCC judge’s ruling had led to an “extraordinary result” in which the consultant would have accepted unlimited liability despite the fact that all of the draft agreements being exchanged and negotiated by the parties had contained a limitation of liability provision (albeit with the limit not finalized).
It is to the benefit of the consultant that the Court of Appeals found that the interim agreement, based upon performance and payment, stood apart from the changing and as-yet-agreed final agreement. The agreement of the parties came to being not because work had been done prior to definitization of a final agreement but because the parties’ actions and the work done evidenced acceptance of an independent contract at a point in time. Further, that a final contract, once agreed upon, would have had retroactive effect and been intended to supersede the interim contract is not pertinent where the final agreement is not reached.
Care should be taken in initiating contract performance under a letter of intent while negotiating a final contract. Here, the consultant dodged a bullet. Had the facts been slightly different – for example, had the parties agreed to work under the letter of intent instead of the letter of instruction, or had the November 11th letter of instruction not been so close in time to the November 8th draft transmittal (or if that transmittal had not suggested a liability limit) – the TCC’s court’s decision might have been upheld.
The bottom line – although letters of intent are useful in initiating project work, the manner in which the work is undertaken pending a final contract must be clear and must take account of appropriate risk allocations. This is as instructive for entry into domestic contract arrangements as it is in transnational arrangements or arrangements involving a foreign subsidiary or affiliate.
For any further analysis of how this decision will affect your interests, or if you have any questions on this article, please feel free to contact Ryan O. Hemminger of Leech Tishman Fuscaldo & Lampl at 626.796.4000.
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*Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd, [2018] EWCA 2222