How will the Court view 'letters of intent' pending final agreements being concluded?

What approach does the Court take in relation to the “letters of intent” pending final agreements being concluded?

The facts

AMEC acted as a specialist concrete sub-contractor on two large projects (i) the Wellcome Building (Wellcome), and (ii) Castlepoint Car Park (Castlepoint).  AMEC engaged with Arcadis Consulting (Arcadis), to carry structural design works for the projects.

The parties planned on entering into a Protocol Agreement which would govern Arcadis’ work on both Wellcome and Castlepoint; whilst negotiations were occurring Arcadis started work on Castlepoint through a letter of instruction from AMEC.  The Protocol Agreement was never concluded.

AMEC alleged that the construction of Castlepoint was defective and sought damages of £40,000,000 from Arcadis.  Arcadis denied liability and submitted that in the alternative, its liability would be capped to the amount of £610,515 on the basis of a contract.

Arcadis relied on a letter of intent (the LOI) sent from AMEC to Arcadis which contained the Protocol Agreement, together with its Schedules and Terms and Conditions.  The Terms and Conditions contained a limitation of liability clause (Clause 2A) which stated:

“The Consultant’s liability for defective work shall be limited to whichever is the lesser of:

(a)     The reasonable direct costs of repair, renewal or reinstatement of any part or parts of the sub-contract works to the extent that the Client incurs such costs and/or is or becomes liable either directly or by indirect way of financial contribution to such costs

(b)     The sum stated in Schedule 1”.

Schedule 1 had been left blank at the time, but a separate letter contained a complete version of Schedule 1, which specified the limit of the consultant’s liability was 10% of sub-contract package for insured losses or £610,515.

The decision

The High Court

Coulson J held that a contract existed as evidenced by the LOI, the acceptance of instructions, the commencement of works pursuant to those instructions and the payment for those works.

The Court disagreed that a liability cap had been incorporated into the contract. The Terms and Conditions sent had been superseded by further negotiations and these were never accepted; there was therefore no liability cap as Schedule 1 was ancillary to the Terms and Conditions.

Arcadis appealed the decision to the Court of Appeal with the core question being whether the Terms and Conditions sent were incorporated by reference into the contract.

Court of Appeal

The Court of Appeal allowed the Arcadis appeal and reversed the decision of the High Court; holding that a liability cap had been incorporated into the contract.

The Court distinguished the LOI, or interim contract, under which the parties were working and the final contract, the terms of which would supersede the interim contract once agreed in its completed form. The relevant contract for the purposes of this dispute was the interim contract.

In a letter from AMEC to Arcadis, it stressed 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”.

Arcadis accepted the LOI by carrying out the works it had been instructed to do and for which it was paid.  In doing so, it accepted the Terms and Conditions and therefore incorporated the liability cap into the interim contract.  The fact that the Terms and Conditions did not make it into the final contract did not preclude their use under the interim contract.

Why is this important?

This decision acknowledges that commercial parties do not always have the time to wait for their lawyers to negotiate clear signed-off terms and conditions prior to works commencing; the reality is that sometimes interim agreements will have to be interpreted from a series of communications and the conduct of the parties.

Any practical tips?

Parties should be particularly careful when drafting, responding to or operating under letters of intent.  Uncertainty as to whether the terms are legally binding, the nature and extent of the terms and the impact of the parties’ dealings and other agreements can lead to disputes.

Even if parties in negotiations expect a detailed agreement to be reached in the near future, they should be careful to ensure that the terms of any letter of intent reflect the agreed commercial terms and provide sufficient protection, particularly in terms of payment and liability.