A recent Court of Appeal ruling has highlighted the dangers of letters of intent and other communications between parties to a contract not yet formally documented and signed.

In the case ofArcadis Consulting (UK) Ltd v AMEC (BSC) Ltd[2018] EWCA Civ. 2222, 10thOctober 2018, the issue that concerned both the Technology and Construction Court and then the Court of Appeal was whether a liability cap had been validly incorporated into the contractual dealings.

The parties had planned to enter into a “Protocol Agreement” that would govern all of Arcadis’ work for the client, but before that could be entered into Arcadis started work on one scheme pursuant to a letter of instruction that referred to the “ongoing negotiations”. The Protocol Agreement was never completed, but the works were completed and were defective.

The Technology and Construction Court ruled that Arcadis had carried out the works under a “simple contract” – the letter of instruction, which was in effect, a letter of intent, but because ‘no final agreement had been reached’ (and notwithstanding that the parties had exchanged three sets of T&Cs that all limited Arcadis’ liability), there was no limitation provision on which Arcadis could rely. This meant that Arcadis faced a possible liability of around £40m, as opposed to the c.£600k liability cap they sought to rely on.

Fortunately for Arcadis, though not for AMEC, the Court of Appeal overruled the Technology and Construction Court, but it did so very much on the facts of the case. The case is a reminder that, while the Court of Appeal’s decision does show that it will uphold informal agreements for the carrying out of works while negotiations are ongoing, as much (if not more) care is arguably required in making sure that these ‘interim’ communications incorporate all the key terms that each party expects to be working under, especially in relation to what is to be done, how it is to be done, what the payment arrangements are, and especially allocation of risk and liability.