Case law: Parties to proposed contract should not start work until they know which terms apply
Parties negotiating a contract, particularly where they are working together on more than one project, should ensure work does not start until a final, formal contract is signed. If that's not possible, they should consider agreeing key terms in an interim contract while negotiations on the final contract continue, to avoid uncertainty over whether and which terms apply, following a recent ruling.
This update was published in Legal Alert - December 2018
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A developer employed a contractor for a car park project, and the contractor commissioned a sub-contractor to do design work.
Serious problems arose with the car park such that it may need to be knocked down and the project re-started. The contractor alleged this was caused by design faults by the sub-contractor and claimed compensation of £40m.
Unfortunately, no formal contract for the project had been finalised. The parties were in negotiations to work together on this and another project, and had therefore decided to enter into one overarching 'protocol' to cover their whole relationship across projects, but this had not been finalised or signed.
There were, however, several drafts of the protocol which the parties had circulated to each other and commented on. These contained clauses limiting the sub-contractor's liabilities if things went wrong. The sub-contractor argued that these limitation clauses applied anyway.
The facts were complex, but the Court of Appeal found that there was a legally binding contract, despite the absence of a formal agreement. It said the terms of the contract could be deduced from a particular letter sent by the contractor to the sub-contractor telling it to start work on the car park, such work ‘to be carried out in accordance to the Protocol Agreement and Terms and Conditions associated that we are currently working under with yourselves’.
It then ruled that the sub-contractor had accepted those terms, either in subsequent correspondence or through its conduct.
In effect, the Court of Appeal said that the parties were working under an 'interim contract' for the time being, comprised of those terms of the intended protocol set out in the letter which had been accepted by the sub-contractor, but which would eventually be superseded by the terms of the protocol once it was finalised.
It did not matter that some of those terms were actually included in the letter because of the second project the parties were planning to work on, rather than the car park project - they were still terms the parties had agreed would apply overall and, in the absence of anything in the interim contract saying they did not, they also applied to the car park work.
- Parties negotiating a contract, particularly if they are working together on more than one project, should make sure that work does not start until a final, formal contract is signed or, if that is not possible, that the parties agree key terms in a specific interim contract while negotiations on the final contract continue, to avoid uncertainty over whether and which terms apply
Case ref: Arcadis Consulting (UK) Limited (formerly Hyder Consulting (UK) Limited) v AMEC (BCS) Limited (formerly CV Buchan Limited)  EWCA Civ 2222
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