Playing hardball in negotiations

Lady Justice Gloster came to Norwich last year for the annual Norfolk & Norwich Law Society lecture. She chaired a panel on equality and diversity in the legal profession. As you would expect from a Court of Appeal judge coming from the Commercial Court, she seemed like she was the kind of judge who took no prisoners. Her views on quotas to improve gender balance seemed controversial for the panel in question, but that is probably left for another day.

I was reminded of her ferociousness (which I suspect was very much toned down for the Law Society lecture) when I read Arcadis v AMEC (2018), a case in which she overturned the judgment of the very well respected Mr Justice (now Lord Justice) Coulson.

In that case, AMEC was a specialist sub-contractor who engaged Arcadis to provide some design work. As often happens, they never agreed final contract terms. They had planned to enter into a “Protocol Agreement” but the terms were never finalised. When AMEC considered Arcadis’ design to be defective, Arcadis defended on the basis that the Protocol Agreement included a limit to its liability; AMEC asserted that as the Protocol Agreement was never actually agreed the limitation clause was not incorporated.

There was a letter of intent on 8 November 2001 which included the Protocol Agreement and some Terms and Conditions, and a letter of instruction much later, on 13 November 2011. The terms included a limit of liability, which was later specified (on 6 March 2002) as 10% of the cost of the works.

Mr Justice Coulson at first instance referred to the relatively familiar cases of RTS v Molkerei (2010) (a contract can be concluded even if significant terms are not agreed) and G Percy Trentham v Archital Luxfer (1993) (if a contract is performed on both sides there is usually a contract). A contract therefore came into existence; that point was not overturned by the Court of Appeal.

However, the question then arose as to what terms were included.

On Coulson’s analysis, the parties never agreed any terms and conditions, despite three sets being bandied about between them. However, on these particular facts, Gloster LJ found that there was in fact an interim contract between the parties, which had been agreed. The letter of instruction clearly included certain terms and conditions that were agreed on an interim basis, though the final contract was not yet agreed. Luckily for Arcadis, the terms on an interim basis included a liability cap. That cap was enforced, saving Arcadis about £39m!

The Court of Appeal’s analysis is, in my view, the better one (sorry, Coulson). It is often unrealistic to think that parties would contract with each other on very simple terms when more complex terms have in fact been agreed, particularly when this much money was incurred.

Although his decision was overturned, Coulson’s advice to contracting parties remains valid. It is usually better for a party to reach a full agreement through a process of negotiation and give and take, rather than delay and then fail to reach any detailed agreement at all.