Parties to a construction contract should agree all terms governing their relationship prior to any work being carried out, and record those terms in a clearly drafted contract document signed by both parties.
Commercial imperatives frequently mean that contracting parties begin their relationships with a degree of uncertainty as to the terms that will bind them, with protracted negotiations continuing while work on site progresses. If those negotiations never mature into a signed contract document there is then a dispute about the terms of the contract. In Cleveland Bridge UK Limited -v- Sarens (UK) Limited  EWHC 751 TCC Joanna Smith QC provided a comprehensive summary of the principles that the Courts will apply in identifying the terms which will bind the parties.
Sarens (UK) Limited (Sarens) was engaged by Cleveland Bridge (UK) Limited (CBUK) to provide cranes and other equipment for the installation of six bridges along the route of the Heysham M6 link road (the Project). CBUK was engaged as a subcontractor to Costain Limited (Costain).
The Project was delayed, and CBUK entered into a settlement agreement with Costain in respect of those delays. CBUK sought to recover from Sarens the sum that it paid to Costain pursuant to that settlement agreement. Sarens’ position was that its contract with CBUK contained a damages provision which included a cap on liability for liquidated damages, which would have an impact on CBUK’s attempts to recover the sum it had paid to Costain. CBUK’s position was that there was no agreed and binding cap on liability.
The dispute as to the existence (or otherwise) of a binding cap on liability arose from the protracted nature of the discussions between the parties as to the terms upon which they would be contracting with one another, and (while the parties agreed that they were in contract with one another) the fact that there was no signed contract.
In order to identify the terms of the contract (and in particular whether or not there was a binding cap on liability), the judge considered the factual background while focussing on the nature of the parties’ negotiations rather than their internal deliberations. The Judge acknowledged that it was “not easy” to identify a clear position on offer and acceptance based on the chronology of events in this case, but assessed the terms of the contract by applying the following “well established” eight principles which she derived from the authorities:
- It is necessary to look at the whole course of the parties’ negotiations.
- The Court will not be concerned with the subjective state of mind of the parties, but will arrive at an objective conclusion as to whether the parties intended to create legal relations.
- The Court will place itself in the same factual matrix as that occupied by the parties, and ask itself how a reasonable man versed in the relevant business would have understood the parties’ exchanges.
- When examining the parties’ exchanges, the Court will be searching for a proposal from one party which is capable of acceptance; and acceptance from the other party.
- Acceptance must be final and unequivocal. Conduct can amount to acceptance, but silence will generally not amount to acceptance.
- The Court can decide that a contract is formed in a manner that is not contended for by either party.
- Events taking place after an agreement is made are admissible when determining whether a particular term was agreed, but are not admissible when construing the terms of an acknowledged agreement.
- When interpreting a term, the Court’s task is to ascertain the objective meaning of the language used when considered against the relevant factual background at or before the date of the contract but excluding evidence of prior negotiations.
Applying the eight principles listed above, the Judge concluded that there was no binding cap on liability based on the facts involved. The Judge said that: the right approach was for the court to assess which terms and conditions the parties were in agreement about.
CBUK had provided a third iteration of the proposed subcontract to Sarens on 11 November 2014 which contained a damages provision including a cap on liability. The Judge concluded that this iteration of the subcontract was subsequently accepted by Sarens, save for the damages provision (including the proposed cap on liability) which was not agreed and therefore did not bind the parties.
This blog post was written by Legal Director Paul Scott.