When a Letter of Intent is actually a contract

Arcadis v Amec [2016] EWHC 2509 TCC, Coulson J

Facts

Amec was specialist subcontractor on 2 large projects and approached Arcadis to carry out design works in anticipation of a wider commercial agreement between the parties.  There were intensive commercial negotiations, carried out while Arcadis was simultaneously supplying design work for Amec’s use.  The correspondence included complex negotiations about commercial terms and Arcadis proposed a cap on liability of £110,000.  Meanwhile the initial letter of intent to commence the works was increased from a £10,000 limit to a £40,000 limit.  Eventually further letters were sent extending the authorised work to be done and increasing the maximum that would be paid to £56,000.

Unfortunately no further contractual agreement was reached, and then all the works were carried out including a large car park. This proved to be defective when constructed.  Amec blamed the design and when Arcadis sued Amec, Amec counter-claimed for £40m.  Arcadis’ defence to the counterclaim was that it had incorporated a limit of liability into its commercial relations with Amec.

Held

1. The letter of intent constituted a simple contract between the parties and when the work scope was increased the contract simply grew in size and scope.
2. Analysing the many complex negotiations between the parties, it was clear that neither side’s commercial terms prevailed, and the stipulated cap on liability was not binding.

Comment

1. This case stresses yet again the serious dangers involved by the use of letters of intent unless commercial parties are extremely careful to ensure that they are replaced as soon as possible by a settled agreement. Failing which, the hiring party should go back into the marketplace to get a more compliant contractor.
2. Given that Arcadis referred to the need to limit its liability in every communication, this outcome might be regarded as harsh. The Judge explained that this was the inevitable consequence of Arcadis’ dilatory and often un-cooperative approach to the negotiation of the terms and conditions.

This case starkly demonstrates the commercial truism that it is usually better for a party to reach full agreement through a process of negotiation and give and take rather than delay and then fail to reach any detailed agreement at all.  In the latter case, both parties have lost control.

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