In the recent case, Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd , the court decided that Arcadis had not limited its liability. This decision has been made even though every version of the terms of contract under discussion had included a limit on the liability of Arcadis for a breach of their professional duty. The judge decided that none of the terms discussed by the parties applied to the contract. Yet there was a contract. How is it possible? In this blog, we will answer that question.
This outcome left Arcadis potentially liable for up to £40m of losses, when it had wanted to limit its liability to £610,515. That’s quite a difference.
Arcadis, although in this case its Hyder subsidiary, had done design work on two large projects for Amec’s Buchan subsidiary. This was done in anticipation of agreeing a wider framework agreement that never materialised. Despite not agreeing the detailed terms of the contract, Buchan still placed the order and Hyder undertook the design work on the two projects.
During the case, Buchan said there were defects in a multi-storey car park and the cost of rectifying these defects was £40m. Hyder claimed its liability was limited to £610,515, which was a figure that Buchan had put forward in contract negotiations. Overall Hyder was paid £285,000 for the design work making it easy to see why they would want to establish that their liability was limited to £610,515 when faced with a potential £40m claim.
What were the commercial issues debated and the outcomes?
There were two issues the court had to decide:
- Was there a contract and, if there was, what were its terms?
The judge decided that the parties had debated three sets of terms of contract, but not agreed on any of them.
- The first set was superseded by the second set of terms.
- The second set of terms was not identified (the parties had both lost the correspondence) and their conduct was read as showing those terms were not agreed in any event.
- The third set of terms had never been agreed.
However, the court found there had been a contract. How did they do that, you might ask? The court said that if one party is carrying out work and the other is paying for it, it will usually find there is a “simple contract” based on the offer to carry out the work and the acceptance of the price for that work.
Often, a court will decide there is a contract even without agreeing a price and, when that happens, the court says the price will be a reasonable price. The court said the original letter of intent was a simple contract and this was superseded by an agreement to keep on working for the agreed price. But the judge said that the other terms of business which had been tabled and debated did not form part of the agreement.
- If there was a contract, was the limit on liability included in it?
At least three limits on liability were discussed between Buchan and Arcadis, but all were different and the judge said that none had been agreed. The court said that there was no limit on liability despite it being Buchan (not Hyder) that had tabled the specific limits that were discussed. The judge concluded that to cut down the normal remedies for a breach of important obligations in a contract, there had to be a clear and express agreement to limit the liability in a specific way. That hadn’t happened; leaving the judge with no choice but to find there was no limit to Hyder’s liability. As a result Hyder may now face further litigation for losses running into tens of millions of pounds.
What actions can a business take to avoid similar outcomes?
- When dealing with contract negotiations, deal with them quickly. During this case the judge said that Hyder could be “properly criticised” for failing to respond promptly to Buchan’s various proposals and that is what caused Hyder’s problems with this contract.
- If you want to limit your liability, reach an agreement on the contract and say so clearly and in writing. The judge concluded that it was a classic case of it being better to have an agreement in order to obtain a limit on liability, even if some of the other terms were not palatable.
- Delay work if necessary – it may have been that Buchan would have accepted it if Hyder had said, “we cannot carry out any work until we have at least agreed that our liability is limited to the level of our professional indemnity insurance that you want (in this case £5m)”. When relationships are good and one party wants a service, it will often look favourably on such a request.
- If you agree something or you do not, be clear about that in the email or letter. To say that an agreement exists, there needs to be a clear offer and a very clear acceptance of that offer. The judge was not able to read that the terms of business had been accepted when Hyder accepted the instruction to do the design work. That meant there was no limit on liability. There was only a contract to perform design work for an agreed fee – no other terms were necessary for the judge to find there was a contract in place.
If you would like further information about limited liability or any other Construction and Engineering matter, please contact our Construction & Engineering team on 0161 475 7676 or email [email protected].