The dangers of delaying agreement

Posted by Edward McMullen on
Sometimes the need to get a project up and running takes top priority, even before the parties have settled all their terms of agreement.  However, the perils of starting work prematurely have been highlighted many times by the courts.  The three recent cases that follow constitute a warning to employers, contractors, project managers… and yes, lawyers too.

In Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd (25 October 2016), the contractor started work on Castlepoint Car Park, Bournemouth, under a letter of intent.  This is a common stop-gap approach, but fraught with risk for the unwary.  The important thing is to check it contains all the right ingredients to be an enforceable contract in its own right.  In particular, specifying what terms and conditions will apply to the works carried out under it.

In Acadis negotiations continued concerning the terms of the main contract but that was never ultimately agreed.  At one point three different sets of terms and conditions were in play, some of which referred to a liability cap.  Arcadis claimed that the contract was evidenced by correspondence and that a cap on its liability had been contractually agreed.  The Judge disagreed.  He criticised Arcadis's "dilatory and often unco-operative approach to the proposed … agreement and the negotiation of the terms and conditions".  He found that the terms and conditions were constantly being amended and were never ultimately agreed.  In particular, the cap Arcadis wanted had not yet been agreed.  Crucially, nor could it be brought into the letter of intent and in that regard Arcadis's liability accordingly remained unlimited.

We advised recently on a similar case, where another common stop-gap had been used: a pre-construction services agreement (PCSA).  An employer (our new client) had engaged a contractor under a PCSA.  However, negotiations for the main contract had not progressed with any speed.  As a temporary fix to avoid stalling progress, further instructions were given under the PCSA, adding considerable construction works to the services.  Regrettably, the contractor went bust before the end of the project and before agreeing the main contract terms; but after having made a significant payment application. 

Where a contract complies with section 111(10) of the so-called HGCRA – as the JCT DB2011 does - an employer (the payer) is not liable to pay any sum due if the contractor (the payee) becomes insolvent.  In addition, the Act says that if the payee becomes insolvent after the period allowed to the employer for serving a pay less notice, but before the final date for payment, the employer is excused from paying even though it has not served a pay less notice. 

Our client's PCSA did not contain the necessary terms that the JCT would have done.  As a result, we explained, he was obliged to pay the claimed sum to the contractor's administrators; even though it was questionable as to how much would reach the relevant sub-contractors that carried out the actual work.

In the Arcadis case and our own example, had the parties and their project managers finalised the intended contracts in good time these expensive consequences may well have been avoided.

In contrast, on 17 October 2016, just a week before the Arcadis judgment, the decision of Spartafield Ltd v Penten Group Ltd was handed down.  The court ruled that, although not formally executed an amended JCT contract had been agreed as it included all the essential terms required. The JCT contract was found to supersede the parties' letter of intent, which put a different spin on things for the respective parties. 

Notwithstanding the consequences of having the contract (rather than letter of intent) in place, the uncertainty that had arisen as to the applicable terms had caused delay and expense to both parties. No doubt their commercial relationship was not helped by the bust up either.

The learning to be taken from these three lessons is that to delay finalising your construction contract is risky and could prove disproportionately expensive the longer the process drags on.  Focus and decisiveness are required to assemble the agreement details and to bottom out contentious issues, before attention wavers or switches to the construction phase. Ampleforth Abbey Trust vs Turner & Townsend Project Management Ltd [2012] offers a salutary lesson here.

A key criticism in the Arcadis judgment was that the claimant was never clear about the terms it accepted and those it rejected, nor why. In our experience it is well worth all parties making a bit of a nuisance of themselves to get the contract over the line properly and promptly.  Picking a pro-active team willing and able to do this with good humour is a good star:.  a stitch in time?

(This blog was the inspiration for James Bessey's piece 'Contracts: Delay Signing At Your Peril' published in Building on 25.11.16, click here to read the full article)

About the Author

Edward specialises in construction and engineering transactions – advising on risk and procurement issues at the non-contentious, front end of projects.

Edward McMullen
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