Lessons from failure: contract before works

Which should come first: works or contract? Well you might expect me to say the contract but here’s why…

The defective car park

In 2001, two companies were trying to agree the terms for a long-term agreement on a variety of projects. One of those projects was in a hurry, so the parties decided to send a series of letters about the project (including a letter of intent). Within a few years of completion defects were found in the car park and a £40m dispute has been raging ever since between the designer and specialist concrete subcontractor of a car park.

The court had to decide if there was a contract and if so, on what terms (here we go again). The TCC judge said:

Whilst the court should always strive to find a concluded contract in circumstances where work has been performed… the court is not entitled to rewrite history so as to incorporate into that contract express terms which were not the subject of a clear and binding agreement.[48]

What should you do?

Although the parties started with good intentions, a protocol (or framework agreement), proposed terms and conditions for each project and related documents… their good intentions were emasculated by the pressures to get the project started.

Lesson 1: a good contract strategy takes into account time pressures

A letter of intent asked the designer to carry out design and drawing work ‘pending formalisation of the relevant agreements’. Once those agreements were executed – including any agreed limit on the designer’s liability – the parties intended the agreements would supersede the letter and govern all designs.

Lesson 2: the letter of intent will rumble on and become permanent if you don’t get on with agreeing terms for the full contract

The designer was insistent that its liability for costs arising from defective design should be limited (and thought it had made this an essential term).

Lesson 3: if you want the protection of the full contract, you need to sign the full contract

During the negotiations, documents were exchanged regularly for comment and review. Often the correct versions of the documents were not kept on file so the court could not decide what had/not been agreed. The court said “If the parties have no records, is the court in a position to say, even on the balance of probabilities, what precise documents made up the attachments?

Lesson 4: proving what has been agreed at specific dates is critical (particularly if you never sign the full contract) so keep records [read more]

Was there even a contract?

The TCC agreed that with Lord Clarke in RTS v Molkerei that once a transaction has been performed on both sides it “will often make it unrealistic to argue that there was no intention to enter into legal relations and difficult to submit that the contract is void for vagueness or uncertainty.”

The TCC decided there was a contract but without any limit on the designer’s liability:

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 liability) through a process of negotiation and give-and-take, rather than to delay and then fail to reach any detailed agreement at al.

The Court of Appeal have since disagreed, upholding a contract limiting the designer’s liability to less than £1m of the £40m claimed, based on the reasonable costs of repair and renewal. But it has taken 17 years to find out what their contract said!

Lesson 5: agree first, start work later

Cases: Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] EWHC 2509 (TCC); RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] UKSC 14

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