Limitations of Liability
After a hard fought bidding process one of the last things a business wants to do is to document the contractual arrangements with a new (or existing customer). However, a case at the end of last year, shows the importance of taking the time to get the contract right.
Arcadis had done design work (albeit through it’s subsidiary Hyder) on two large projects for an Amec’s subsidiary, Buchan. The design work had been undertaken on an understanding that a wider framework agreement would be agreed and entered into.
Unfortunately the framework agreement never came to fruition and despite not agreeing the detailed terms of the contract, Buchan still placed the order for the design work and Hyder completed the design work on the two projects.
Issues arose in the multi-storey design and the cost of rectifying these defects was valued at around £40 million. Hyder claimed that it’s liability had been limited to £610,515, this being the limit that Buchan had put forward during the contract negotiations. The amount received by Hyder for the design work was £285,000 so a limit on liability of £610,515 does seem reasonable. To be faced with a £40 million claim is a somewhat different liability level.
There were two issues the court had to decide:
Was there a contract and, if there was, what were its terms?
The judge decided that the parties had discussed three sets of terms of contract, but had not in fact agreed on any of them as:
- The first set was superseded by the second set of terms.
- The second set of terms was not identified (the parties had both lost the correspondence) and their conduct was read as showing those terms were not agreed in any event.
- The third set of terms had never been agreed.
However, the court found there had been a contract for the simple reason that the court said that if one party is carrying out work and the other is paying for it, it will usually find there is a “simple contract” based on the offer to carry out the work and the acceptance of the price for that work. The court said the original letter of intent was a simple contract and that this was superseded by an agreement to keep on working for the agreed price.
However, it was decided that the other terms of business which had been put forward by both parties did not form part of the agreement.
If there was a contract, was the limit on liability included in it?
The parties had discussed at least three different limits on liability, and ultimately, none had been agreed.
The court said that there was no limit on liability despite it being Buchan (not Hyder) that had tabled the specific limits. The judge determined that to reduce the normal remedies for a breach of obligations in a contract, especially ones as important as liability, there had to be a clear and express agreement to the reduction in a specific way. This had not happened and left the judge with no choice but to assert that there was no limit to Hyder’s liability. As a result Hyder may now face further litigation for losses running into tens of millions of pounds.
- Contract negotiations should be started and concluded quickly. During this case the judge said that Hyder could be “properly criticised” for not responding promptly to Buchan’s numerous proposals and resulted in a muddled view of the contract from Hyder.
- Limiting a party’s liability should be by agreement, be clear and written down. The judge concluded that it was a classic case of it being better to have an agreement in order to obtain a limit on liability, even if some of the other terms were not some commercially friendly.
- Delay work if necessary. This is always tricky, especially if one of the contracting parties has fought tooth and nail to get the work. However if Hyder had waited until the liability limitations had been agreed (perhaps to this professional indemnity insurance level), then Hyder would be in a far less vicarious position in which it now finds itself.
- Clarity is king – in order to say that an agreement exists, there needs to be a clear offer and a very clear acceptance of that offer. This was not apparent in this case as the judge was not able to determine that the terms of business had been accepted when Hyder accepted the instruction to do the design work. So therefore there was no limit on liability.