Completing the contract first: does it matter?
It's not unusual for parties to start work without agreeing the formal contract terms first. That can cause a number of potential difficulties, as Lucinda Robinson explains.
Commercial drivers mean work must start. Never mind that terms are not agreed, and a contract has not been signed. How many times have we heard this at the outset of a project? When the parties trust each other, the energy levels are high and financial pressures require a quick start, the practical solution is to sort it out later, agree a letter of intent or make do with an exchange of emails. All will be fine, right?
Wrong. Fast forward a few months, or years, when the project is in delay or the building is defective, trust has broken down and the new commercial imperative is to preserve the intended return on investment or profit, or to minimise a loss, and suddenly everyone wants to understand their rights and obligations. The real issue, perhaps payment, defects or delay, cannot be untangled otherwise. The contract, or lack of one, takes the spotlight.
The first questions are: is there a contract and, if so, on what terms? A leading case on contract formation, RTS Flexible Systems Limited v Molkerei Alois Muller GmbH  UKSC 14 v Muller, confirmed at Supreme Court level that the court will carry out an objective consideration of what the parties have agreed based on their words and conduct. Whilst the courts apply this principle, it remains difficult to ascertain the existence and content of a contract. Even in RTS v Muller it took 3 courts, 9 judges and 3 different decisions to determine there was a contract on MF/1 terms. Plus of course, each case is fact specific.
Courts have grappled with these questions in three cases recently, highlighting yet again the dangers of proceeding without an executed contract.
Williams Tarr Construction Ltd v Anthony Roylance Ltd & Anthony Roylance  EWHC 2339 (TCC)
Williams Tarr Construction (“WTC”) claimed against an engineer, Mr Roylance, who had provided some design services in relation to a defective retaining wall.
The court had to decide if Mr Roylance had contracted in his personal capacity or as Anthony Roylance Ltd, if he had designed the wall or just a drain and if the standard of care was reasonable skill and care or fitness for purpose. Contrary to Mr Roylance’s belief that he had contracted through his company, it held that Mr Roylance had contracted as himself. None of the documents exchanged suggested that he was acting as a corporate. Fortunately for him, Mr Roylance was responsible only for the drain on a reasonable skill and care basis only. The wall was a global system and Mr Roylance, who had designed just one part, had not accepted responsibility for the whole or for achieving a higher standard.
WTC admitted the contract had been a “rushed job”. There had been email exchanges but they did not adequately clarify the party, scope or standard of care. If they had, litigation may have been avoided.
Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd  EWCA Civ 2222
AMEC (Buchan) claimed that Arcadis (Hyder) was responsible for the defective design of a car park and should pay £40m. Hyder denied liability and, alternately, argued its liability was capped at £610,000.
The court had to determine if there was a contract and on what terms. At first instance, the Judge found a simple contract existed (mainly because works had been performed), but it did not incorporate either party’s terms or a cap, because too much was uncertain and not agreed. The Judge emphasised that the word “accept” had not been used in response to any proposed terms.
The Court of Appeal disagreed. There was a contract, and it incorporated terms including a cap. It distinguished between the agreed interim contract that the parties were working under and the final contract that would take over, which was still under negotiation.
Buchan’s letter of intent dated 6 March 2002 was a request that Hyder start work on its terms, which included a cap by reference to another document. It was an “if” contract, under which Buchan promised to pay if Hyder performed. Hyder accepted the interim deal by (importantly) performing and, potentially, by another letter.
It was also recognised that during negotiations all exchanges had assumed Hyder’s liability would be limited, so this decision reflected the commercial intent (although this was not the basis of the decision).
Anchor 2020 Ltd v Midas Construction Ltd
Works began before a contract was agreed. A series of letters of intent culminated in one expressed to expire on 30 June 2014. That day came and went without a signed contract. When Anchor then sent Midas a JCT DBC 2011, Midas signed it and added a risk register excluding some parts of the scope. Anchor did not agree the exclusions, so did not countersign. Works continued.
When the final account was disputed, a preliminary issue was whether there was a contract and, if so, on what terms. Midas argued that there was no contract and sought payment based on quantum meruit. Anchor said there was a contract on the JCT terms.
The court agreed with Anchor. Even though Anchor had not countersigned, the contract was binding. The key terms were agreed at the point Anchor sent the contract to Midas who had insisted on a written contract, signed it signalling acceptance and (again, importantly) went on to perform the works. The inclusion of the risk register was not a counter-offer because the substance of the terms was not changed; or if it was, only in a manner consistent with a variation. The fact Anchor had not signed did not matter given the other circumstances.
What happens in practice?
These three cases are not extreme examples. Regularly disputes arise involving:
- Contracts including inconsistent or incomplete terms and referenced documents;
- Contracts that have not been signed at all or not signed correctly;
- Battles of the forms, where a loss on this point could cost the defendant its defence, or limits, on liability;
- Letters of intent that were not finalised, updated when their limits expired or replaced by formal contracts; and
- Mid-contract “line in the sand” letters aiming to reset the scope, programme and price but failing to clarify those critical issues.
Most of these matters go unreported because they are resolved through negotiation, mediation or adjudication, but they are advised on often.
If a case gets to court then the parties may find themselves, as Midas and AMEC did, bound by terms that they had not intended to agree, especially if works have been performed. Ultimately, the rules that determine their entitlements will not be theirs to decide; by proceeding without a clear agreement they will have lost control.
How can parties protect themselves?
Preaching perfection is easy – close out the contract before works start. On occasion, contract negotiations do not always move at the required pace, in which case consider these points:
- If getting the contract signed first really is impossible, finalise it quickly afterwards and nominate someone to take responsibility for doing so.
- Procurement processes should allow a reasonable amount of time for negotiations, expecting a few rounds of discussions and drafting updates.
- Double-check all details in the contract are clear and correct, including names, price, programme, technical documents and negotiated amendments, so the deal is captured accurately.
- If a letter of intent, or interim contract, is to cover the period between works starting and a contract being finalised consider if:
4.1 The issues preventing the formal contract being completed will need to be resolved for a letter of intent, then it may not be possible to agree that either, and a temporary fix may not be possible.
4.2 It is to be binding in whole or part, or not at all, then ensure the words clarify the intended position precisely. The words “subject to contract” indicate a document is not intended to be binding, but they are not conclusive.
4.3 It provides sufficient protection, considering it is likely to be shorter and less comprehensive than a full-blown contract.
4.4 There should be a limit on the scope of work, time period covered, costs to be incurred and the contractor’s liability. Any limits require regular review, and perhaps extension, if a contract is not concluded quickly.1
- Those relying on winning battles of the forms should ensure their terms are the “last shot”; i.e. the ones on the table at the point an offer is accepted.2 They should ensure (1) their terms are up-to-date, (2) referred to or included on template documents for quotations, purchase orders, order acknowledgements, delivery notes, invoices, email footers and other relevant documents, (3) systems are in place to ensure these documents are issued correctly and at the right time, and (4) personnel are trained to implement those systems.
- Risk, as well as value, should determine how carefully a contract is documented. In Arcadis v AMEC the contract sum was c.£56,000, but the sum in dispute was £40 million.
Contracts are the instruction manual for implementing projects, the building blocks of trade and the repair scheme for finding a solution when issues arise. Businesses rely on the promises set out within them being kept for the success of their endeavours. When this is forgotten, and care is not taken to put contracts in place correctly or at all, enforcing (for example) the right to be paid on time, or the recovery of the costs of remedial works, becomes much harder. Heeding only the commercial drivers of today, and ignoring those of tomorrow, has its own price.
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