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'Common sense prevails' when work began before contract finalised

The Court of Appeal has upheld a limitation of liability clause negotiated between the parties on a defective construction project, when work began before the parties formalised those terms.

Its decision overturns that of the High Court, which had held that no terms and conditions could be incorporated into the contract. Specialist concrete sub-contractor CV Buchan Ltd ('Buchan', now AMEC BCS) had engaged engineering firm Hyder Consulting Ltd ('Hyder', now Arcadis) to carry out certain design work in connection with two large projects, referred to in the documents as the Wellcome Building and Castlepoint Car Park. The design work on Castlepoint Car Park was later alleged to be defective.

The parties had exchanged multiple versions of the proposed terms of a 'protocol agreement' intended to cover both projects, dated 8 November 2001, 29 January 2002 and 6 March 2002. Each of these included a different limitation of liability clause. In a letter dated 6 March 2002, but sent before the revised set of terms and conditions of the same date, Hyder instructed Buchan to carry out the work on the Castlepoint project "in accordance to ... the terms and conditions associated that [the parties] are currently working under".

The Court of Appeal held that this was a reference to the terms set out in the 8 November 2001 version of the agreement, which had been accepted by Hyder in relation to the Wellcome project. The January 2002 version of the terms, although more recent, had not been unequivocally accepted by the parties. For this reason, any liability on Hyder's part for defective design work was limited by the liability cap proscribed in the November 2011 version of the agreement.

Giving the judgment of the Court of Appeal, Dame Elizabeth Gloster said that the High Court judge had correctly found that Buchan and Hyder had entered into a binding contract. However, the High Court judge had incorrectly found that the parties could not be taken to have agreed to the liability cap included in the November 2001 version of the agreement, she said.

"As a matter of construction, the first 6 March letter was a request to start work on all of the terms as set out in that letter of intent," she said. "That is because, in the letter, Buchan requested Hyder to carry out a certain performance and promised Hyder that, if it did so, the latter would receive a certain performance in return ... The first 6 March letter was a standing offer, which if acted on before it lapsed or was lawfully withdrawn, would result in a binding contract."

Moving on to consider the terms which should be incorporated into that binding contract, the Court of Appeal judge found that it could not be said that there was no "final and unqualified expression of assent" just because Hyder did not use the word "accept" in its responses to the 6 March 2002 letter, as ruled by the High Court judge.

"The law simply requires the assent to be final and unqualified," she said. "In this case, there is no evidence of a rejection of any of the terms or a counter-offer, and consequently, once the judge had found there was acceptance by conduct, it follows that Hyder unequivocally accepted all of the terms in that letter."

"[O]n a proper construction, [the reference to the terms and conditions] is a reference to the November Terms, which were agreed on the parallel Wellcome Project. I am persuaded that the [High Court] judge's conclusion that no terms and conditions had been agreed as at 6 March 2002 was based on the judge's mistaken construction of the relevant documents," she said.

Corporate litigation expert Tara Dugan of Pinsent Masons, the law firm behind Out-Law.com, said that, in its judgment, the Court of Appeal had "emphasised that where work has commenced during contractual negotiations, commercial common sense will prevail".

"Whilst this decision may assist or provide some relief to contractors who have started work pursuant to a letter of instruction, it should also act as a stark reminder of the need for contracting parties to expressly reject or counter any proposed terms that they are not comfortable with before any work commences," she said.

Construction disputes expert Joanna Higgins said that it was interesting that the Court of Appeal chose "the completely diametric view to that of the respected TCC judge" in a case in which there were only two ways of characterising the contractual arrangement that the parties reached.

"The issue of works on site starting before the formal contract is signed is a frequent issue in the construction sector, so whilst the case doesn't make new law it is of interest in illustrating the risks associated with these kinds of arrangements when issues such as how much liability the contractor has taken on are so unclear to both parties," she said.

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