The importance of finalising a contract before starting work

12th December 2016

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professionals handshake over contract for construction of building

A recent High Court case highlights the importance of reaching agreement on the terms of your contract before starting work (Arcadis Consulting (UK) Limited v AMEC (BSC) Limited [2016]). The outcome of failing to do so for one of the parties (Arcadis), was that its financial liability was unlimited.

The facts

Essentially, the facts were that:

  • As part of a wider project, AMEC wished Arcadis to carry out certain design works in respect of the construction of a car park.

  • Negotiations over the terms of the contract that was to govern the work were protracted - between November 2001 and March 2002, AMEC sent an agreement and three different drafts of its terms and conditions to Arcadis. The terms and conditions contained a cap on Arcadis’ liability. However, Arcadis did not agree fully to any of the drafts.

  • Ultimately, AMEC needed work to start on the car park, so it instructed Arcadis, by letter, to begin the design works, pending final agreement of the terms of the contract/terms and conditions. The letter of instruction stated that AMEC would pay Arcadis a specific sum of money for the work in question.

  • Final agreement was never reached on the documentation that was to form the basis of the contract between the parties. 15 years later, the car park in question was alleged to be defective. AMEC sought to recover from Arcadis damages in the region of £40 million.

The dispute

A dispute emerged as to whether:

  • There was, in fact, a contract between the parties.

  • If there was a contract, what its terms were – and in particular, whether the contract incorporated any of the documentation issued by AMEC.

  • Whether, any such contract included a financial cap on Arcadis’ liability (a cap of £610,515 had been proposed by AMEC at one stage in the negotiations).

The High Court’s decision

The High Court decided that:

  • Even though the parties had not reached final agreement on the documentation that was intended to form the basis of the contract between them, a simple contract existed between the parties.

  • The simple contract was based on AMEC’s letter of instruction, which had offered to pay Arcadis a specific sum of money for the work required. Arcadis had accepted this offer by undertaking the work in question.

  • The simple contract did not incorporate the written agreement or any of the drafts of the terms and conditions sent to Arcadis by AMEC.

  • The simple contract also did not incorporate the cap on Arcadis’ liability that had been proposed by AMEC, as no clear agreement had ever been reached by the parties on this point.

The court also criticised Arcadis’ approach to the negotiations, because it had delayed matters and had not been clear about what it accepted and what it rejected.

Key points to take from this case

  • It is dangerous to start work on a contract before you have reached final agreement on the contractual terms that are to apply to it. This is because, depending on the facts, the courts may decide:

    • That a contract exists, but not on the terms you were in the process of negotiating;

    • That no contract exists, which may leave you completely unprotected (e.g. the other party may not be subject to an obligation to pay you).

    It is far better to delay commencement of the work until the terms of your contract have been agreed and set out in writing.

  • If there is pressure on you to sign an interim contract so that work can begin before you have reached agreement on the detailed contract terms, whilst this may be preferable to having no written contract at all, risks will still apply. For example:

    • It’s unlikely that the interim contract will include all relevant terms. (otherwise why would you need an interim contract?). So there may be areas where the terms are unclear or you are unprotected;

    • If you fail to reach agreement on the detailed terms before work is completed or before a dispute arises, the terms set out in the interim contract will apply.

    If you do plan to enter into an interim contract, think carefully about what terms are critical to you and make sure that these are agreed and set out clearly in writing (e.g. liability, price, payment, rights to terminate). Also think about whether it is possible to limit the application of the interim contract to a specific part of the work or project. 

  • To protect yourself while you are still at the negotiating stage, make sure you mark all correspondence, including emails, “subject to contract”. However, use of this phrase will only protect you so far, and if you start work before final terms are agreed, a contract may still be found to exist between you and the other party.

  • Be clear in any negotiations what you do and do not agree to (and, where you do not agree to something, what your alternative proposals are). Also, do your best to move negotiations along.

The last word

We’ll let the High Court judge in the case have the last word…

“This 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 [Arcadis’] liability) through a process of negotiation and give-and-take, rather than to delay and then fail to reach any detailed agreement at all.”

Further information and legal support

If you would like to discuss this or any other advice, please do not hesitate to contact any member of the Commercial Team.

This guidance note is intended solely as an overview of the law in England and Wales. No responsibility can be accepted for the completeness or accuracy of this guidance note and professional advice should be taken in relation to any specific matters. 

RELATED:    COMMERCIAL >> PROCUREMENT >> COMMERCIAL CONTRACTS >>


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