Two recent construction cases highlight the pitfalls of not properly agreeing all of the contract terms and conditions before starting the relevant works.

In Arcadis Consulting (UK) Ltd v. AMEC (BSC) Ltd, an engineering firm, then called Hyder Consulting UK Ltd (“Hyder”) was appointed to provide structural engineering design services to a contractor, then called CV Buchan Limited (“Buchan”).

The parties anticipated a framework arrangement under which Buchan could instruct Hyder across a number of different projects, with each order being instructed under the framework and subject, in general terms, to the overarching framework terms and conditions.

One such project was at Castlepoint Car Park in Hampshire. Pending an agreed framework Hyder commenced with the delivery of their design services under a letter of intent. Various later communications were exchanged by the parties but no formal framework agreement was ever entered into. One matter that Hyder was anxious to address, albeit belatedly, was the extent of its liability for defective design.

Following completion of Hyder’s services serious defects emerged in the car park and Buchan is in the process of seeking to recover damages from Hyder in that respect. Before the Court, Buchan’s claim against Hyder was apparently £40 million.

Against that backdrop, Hyder argued that it had in fact successfully capped its liability during the negotiation phase of the terms and conditions. The Court disagreed. It held that no agreement in relation to Hyder’s liability was achieved in the various communications that post-dated the commencement of Hyder’s services. Instead the parties had embarked on the works agreeing only a simple contract, namely that Hyder would carry out design work and be paid for that work by Buchan.

As the Court itself pointed out, 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 all”.

Much the same might have been said for Dacy Building Services Ltd (“Dacy”), in the case of Dacy Building Services Ltd v. IDM Properties Ltd (“IDM”). Here, the matter wasn’t so much what terms and conditions applied but rather who Dacy had actually contracted with.

Dacy became involved in an on-going construction project following other sub-contractors walking off site. The main contractor, HOC (UK) Ltd (“HOC”), was said to be in financial difficulty. The employer under the building contract was a joint venture, which included an IDM company, although not, it was said, the specific IDM company later pursued by Dacy in respect of payment.

Nevertheless, following a meeting at which representatives of Dacy and IDM were present, Dacy considered it had reached agreement to work directly for IDM rather than for HOC, albeit HOC remained the main contractor and Dacy was in effect providing only sub-contract labour. No agreement in writing between Dacy and any IDM company was put in place or otherwise agreed however.

Dacy’s early invoices were paid – although there was some confusion before the Court as to who by - but when payments dried up it adjudicated against IDM in respect of outstanding sums due. Note that parties to a construction contract can now adjudicate even on oral contracts, as was asserted to be the case here.

IDM maintained throughout the adjudication that no contract between it and Dacy existed and thus there was no dispute and the adjudicator had no jurisdiction. Dacy succeeded before the adjudicator, and was awarded £247,250, but it later became unstuck at enforcement stage in its application for summary judgment. The Court found that there was a realistic prospect that IDM could succeed in its defence that there was no contract at all between Dacy and IDM. On that basis it refused summary judgment.

Both cases are dealing with starkly different factual circumstances; however, both sets of circumstances will be only too familiar to construction professionals. In Arcadis it was design work proceeding without a formal contract in place. Such work sometimes is, at least initially, undertaken on an informal or even occasionally speculative basis. In Dacy, a sub-contractor is brought into a troubled project late with rumours of main contractor insolvency, and confusion reigns as to whether an agreement to pay the sub-contractor direct was part of the bargain. The lesson? Get your contract clearly documented before proceeding.