Will the real 'commercial reality' please step forward…
Arcadis Consulting (UK) Limited (formerly Hyder Consulting (UK) Limited) –v- AMEC (BSC) Limited (formerly CV Buchan Limited)  EWCA Civ 2222
The dispute arose from defects in the Castlepoint shopping centre's pre-cast concrete carpark ("the Car park"), which are so severe they are alleged to require the Car Park to be demolished and rebuilt at a cost of many tens of millions of pounds. Buchan engaged Hyder to provide design services. Hyder claimed that regardless of any liability for the defects, it had the benefit of a contractual cap of £610,515 in respect of its design work.
At first instance the TCC's most experienced judge, Mr Justice Coulson (as he was then), described the case as "a relatively simple 'contract/no contract' case with something of a sting in its tail." and determined that Hyder did not have the benefit of its claimed liability cap. The Court of Appeal, in unanimously reversing the decision, described that conclusion as "an extraordinary result".
In November 2001, Buchan provided Hyder with a template set of documents for a framework agreement between them in respect of work on construction projects involving pre-cast concrete components ("the November terms"). The November Terms included a draft proposal for a cap on Hyder's liability for defective work (which by reference to a subsequent schedule was fixed at £610,515). However, despite exchanging amended proposals for several months no agreement could be formalised.
In February 2002, Hyder began its design work on the Car Park, pending the finalisation of the agreement and sought a letter of instruction from Buchan for that work, subject to finalisation of the framework agreement. On 6 March 2002, Buchan provided Hyder with their letter of instruction. By separate letter, it also sent Hyder updated draft framework terms which it said would apply to all of Buchan's executed works ("the March Terms"). Those terms included a new draft proposal for the cap on Hyder's liability that was unacceptable to Hyder.
In the event, the terms of the protocol agreement were never agreed. Hyder completed its design work on the Car Park pursuant to extensions to the terms of the letter of instruction. When the Car Park was alleged to be defective, Buchan brought a claim against Hyder for defective design. Hyder sought to rely on the cap of £610,515.
Was there a binding contract?
At first instance, Coulson J found that a binding contract was created in March 2002 by Hyder accepting to undertake design work pursuant to Buchan's letter of instruction of 6 March 2002, but that the only contractual obligations were for Hyder to perform its design work and for Buchan to pay for it. Neither the November Terms, nor the March Terms were incorporated into the contract because Hyder had not accepted them by a final and unqualified expression of assent. Consequently, there was no cap at all on Hyder's liability.
Coulson J commented that his decision was superficially harsh on Hyder where every set of proposed terms and conditions had included a liability cap in some form or another. He suggested that the case "starkly demonstrates the commercial truism that it is usually better for a party to reach a full agreement (which in this case would almost certainly have included some sort of cap on their liability) through a process of negotiation and give-and-take, rather than to delay and then fail to reach any detailed agreement at all.".
The Court of Appeal disagreed and found that the binding contract made in March 2002 did incorporate the November Terms, which were the set of terms that the parties were "working under" (for the other project) at the point of their reference in the Car Park letter of instruction on 6 March 2002. The Court of Appeal categorised this as an 'interim contract'.
The overall result being that Hyder, appears to have the benefit of a £610,515 cap against Buchan's claim for £40 million. It is not especially clear why the Court of Appeal felt that outcome was any less 'extraordinary' than Hyder having no cap on its liability and being required to compensate Buchan in line with the true assessment of that liability.
An 'extraordinary result' or commercial common sense?
The Court of Appeal's reasoning was heavily influenced by the judgment of Goff J in British Steel Corp v Cleveland Bridge & Engineering, where he determined that following a letter of intent, one of two forms of contract may come into existence:
(i) An ordinary executory contract, under which each party assumes reciprocal obligations to each other, or
(ii) An 'if' contract under which A requests B to carry out certain performance and promises B that, if he does so, he will receive certain performance in return, usually remuneration for his performance. This is really no more than a standing offer which if acted upon before it lapses, or is withdrawn, will result in a binding contract.
Coulson J found that the first type of ordinary (or simple as he called it) contract was made in March 2002, whereas the Court of Appeal found that the second type of 'if' contract was made, which incorporated the November Terms and the consequential £610,515 liability cap.
The Court of Appeal borrowed some of Goff J's reasoning in British Steel Corp that, if the parties are in a state of negotiation and one party asks the other to begin work 'pending' the parties entering into a formal contract, it cannot be inferred 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. Consequently, the harshness of the result was a reason why Coulson J should have reached a different conclusion. However, it seems it was precisely that reasoning that drove Goff J to conclude in British Steel Corp, the 'if' contract analysis was less attractive in the scenario where work was being done pending a formal sub-contract, the terms of which were still in a state of negotiation, because it was impossible to predict what liability (if any) would be assumed by the parties in respect of defective services.
Curiously, the Court of Appeal also commented that it would not make commercial common sense that, while work was ongoing and the final contract was being negotiated, every new version of the terms and conditions sent between the parties would automatically supersede the original November Terms being worked under, unless the parties explicitly said so. Although, it could be argued that situation is precariously close to the Court's finding that there was an 'interim' contract in March 2002 that incorporated the November Terms despite there being no explicit acceptance of those November Terms and where the final terms were the subject of ongoing negotiation where the implication is that the latter accords with commercial common sense.
At the point that the contract was being negotiated, neither party should have any particular expectation of the car park being defective and so the agreement of the formal contract was a normal process of negotiation with each party prudently seeking to protect itself against loss generally. The fact that a professional consultant might choose to undertake work for a contractor under a letter of intent is a normal feature of construction projects. The purpose of the consultant seeking a letter of intent is usually to protect its position in respect of the immediate prospect of unpaid fees rather than any strong desire to limit its liability in the event of its work being defective. One version of the commercial reality underpinning most professionals is the issue of turning 'work in progress' into cash and a contract formed by a letter of intent is no more than a vehicle to achieve that.
The Court of Appeal's approval of the proposition that "if the parties are in a state of negotiation and one party asks the other to begin work 'pending' the parties entering into a formal contract, it cannot be inferred 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" seems to ignore the fact that in this case Hyder had been working for 1 month prior to seeking the letter of intent from Buchan. During that period Hyder was potentially at risk for unlimited liability in relation to any services provided and was happy to proceed on that basis. Presumably, the commercial reality of that situation was that Hyder wanted the job sufficiently to begin work without any contract at all being in place and allowing the final terms of the intended contract to remain un-agreed throughout.
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