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A question of construction: liability caps and building contracts

Leah Fisher

In Arcadis v AMEC, the Court of Appeal held that a liability cap had been incorporated into a letter of instruction.

AMEC, a specialist concrete contractor, employed Arcadis, an engineering outfit, to help design two construction projects: the Wellcome Building and Castlepoint car park. A detailed Protocol Agreement was exchanged but never finalised. Work was started when only a letter of instruction was in place. The car park design was said to be so defective that it needed rebuilding at a cost of GBP 40m. Arcadis sought a declaration that it was not liable and that any liability was capped at GBP 610,000 under the provisions of the contract it said was in place.

At first instance, the judge found that, in the absence of the Protocol Agreement, the letter of instruction was a mere letter of intent. It only gave rise to a “simple contract” including the right to be paid. While three sets of detailed terms and conditions had been exchanged, they were not agreed. Accordingly the liability was uncapped.

The Court of Appeal disagreed. The letter of instruction was a request to start work on the terms set out in it. The judge had put too much emphasis on the lack of formal acceptance.

The letter of instruction referred to “terms and conditions…that we are currently working under with yourselves”. This was held to be a reference to the terms agreed for the Wellcome Building. These included the liability cap.

While the Court of Appeal came to the rescue this is a salutary reminder of the risks of starting work before the detailed contractual documentation is in place and the need to make sure letters of intent cover the essentials (eg liability caps).

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

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