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Ted Lowery

Do I have a Contract? Part I: Introduction 1.

Any one with experience of building will recognise that the contract is of fundamental importance. A building contract should define the relationship between the parties so that each knows what is going to be built, how long it should take and how much it is going to cost.

2.

The general requirement for a contract is that at some point, the parties who want to enter into a contract reach agreement on the terms of that contract. The essence of a building contract, like any other contract, is agreement.1

3.

To use one of those helpful Latin phrases that we are now discouraged from using, there has to be a point at which the parties are ad idem, i.e. of the same mind, as regards the terms of the contract they wish to agree and, generally speaking, the contract will be formed when the parties reach that point.2

4.

Part II of this paper describes the fundamental requirements of a building contract. Part III goes on to consider the position in which it may not be clear whether all terms have been agreed or whether a contract has been formed. Part IV deals briefly with the issue of contract formation in relation to letters of intent.

Part II: Contract formation - the fundamentals 5.

6.

Building contracts do not enjoy any special status. The fundamental requirements for contract formation established by common law equally apply to building contract formation. In summary, a contract will have been formed if the following criteria are satisfied: •

the contracting parties have legal capacity to enter into a contract;

•

the contracting parties had an intention to enter into a contract;

•

the contract is supported by consideration;

•

(in certain limited circumstances) the contract is in writing;

•

the contract is not for an illegal purpose;

•

there has been offer and acceptance.

I deal with these in turn. Capacity

1. Keating on Construction Contracts Eighth Edition 2006 at paragraph 2-001. 2. In this paper, “formed” and “formation” are used in context to indicate the point at which the parties reach agreement. 3. Individuals lacking full capacity include undischarged bankrupts, minors (i.e. persons under 18 years of age) and persons of unsound mind.

7.

There is a general assumption that every adult individual, company, partnership or other legal entity has the right to enter into contracts of their volition. However, certain categories of individual are not regarded as having full capacity3 and companies, corporations and unincorporated associations may not, in accordance with their own internal rules, have the capacity to enter into certain contracts. Contracts entered into with entities lacking capacity are subject to restrictive provisions and/or may be unenforceable.

8.

Issues of contractual capacity per se do not frequently arise in building

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contracts (although there may be uncertainty over the identity of the contracting party, for example where a subcontractor operates both as a sole trader and as a limited company or where the employer operates through an agent). Intention to contract 9.

Contracts cannot be formed by chance so it needs to be shown that the parties did intend to enter into a binding agreement. In the context of building works it is usually safe to assume that whether or not the parties ever got round to agreeing the terms of a contract, they did start off with the intention that works were to be the subject of a commercial transaction and were not going to be provided gratuitously. Consideration

10.

In very general terms, the recipient of a benefit under a contract must offer something – the consideration - in return. An arrangement that is without consideration will usually be regarded as a bare promise and will not give rise to enforceable contractual obligations. This is unlikely to be a problem in building contracts because construction works are not ordinarily provided for free, so the contractor’s consideration comprises the works and the employer’s consideration comprises payment for the same.

11.

Consideration (or the lack of it) is, however, important in relation to collateral warranties. Where a contractor or subcontractor is required to make a promise in respect of the quality of its work to someone other than the employer who is paying for it (the beneficiary), for example an incoming tenant or a funder, neither of whom will be offering anything in return, the requirement for consideration will not be satisfied. There are two ways round this:

12.

(i)

To make the collateral warranty a Deed, which is a particular type of contract that does not require consideration.

(ii)

To make the warranty the subject of a nominal payment from the beneficiary to the contractor. Hence if not a Deed, the opening words of the warranty will say something like, “In consideration of the payment of £1…”

In either case the warranty will be enforceable as a contract. Contracts that must be in writing

13.

The two principal types of contract that must be recorded in writing are: •

contracts relating to the sale or disposition of an interest in land; and,

•

contracts of surety or guarantee.

14.

Building contracts do not usually involve the sale or disposition of an interest in land. The contract will usually include a licence to occupy the site, but that does not change the land ownership. A notable exception occurs where, under a building lease, the contractor is given a leasehold interest in the land, in which case the contract must be in writing and will not be enforceable otherwise.

15.

Parent company guarantees are more frequently encountered in construction and these must be recorded in writing. Typically, the parent company or the employer will have their own form of wording and it is

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rare for such a guarantee to be offered solely on a verbal basis. It is possible that at some stage during negotiations, an individual may say something like, “I will guarantee my company’s performance”, but such a “guarantee” will not be enforceable unless it is recorded in writing. 16.

It follows from this that the vast majority of building contracts need not be in writing but can be verbal or partly verbal and partly written. Although such contracts will be enforceable, the absence of a full written record of the agreement may make it difficult to identify precisely what was agreed.

17.

Current adjudication case law requires that for the purposes of Part II of the Housing Grants, Construction and Regeneration Act 1996, all of the terms of a “construction contract” (as defined in section 104) must be in writing.4 Illegal purpose

18.

A contract that has an illegal purpose will not be enforceable. The classic example is that of an agreement made between two highwaymen to divide the spoils of their robberies. Very few building contracts will be illegal per se but any arrangement that has a criminal or fraudulent purpose – for example bribing a foreman to turn a blind eye to poor workmanship - will not be enforceable as a contract. Offer and acceptance

19.

Contract formation requires an offer to have been made and that offer to have been accepted. The offer and acceptance must relate to obligations that are reasonably certain and deal with the points that are essential to the bargain made. Certainty

20.

It is necessary for each party to know what its particular obligations are, so whether or not the terms agreed are sufficiently certain will depend upon the subject matter of and background to the contract. However, it needs to be borne in mind that if called upon to decide whether or not the terms of an agreement are sufficiently certain, the court will do its best to interpret the words used so as to create certainty and make the agreement work. Hence, as a general rule, it is only those agreements that are so vague as to allow for no realistic commercial interpretation that will be unenforceable as contracts. For example, in Scammell and Others v Dicker,5 Lord Justice Rix noted that a Consent Order in respect of boundary dispute proceedings could be interpreted in four different ways, but applied the legal dictum “that is certain which can be rendered certain”6 and chose the interpretation he thought best suited the terms of the Consent Order and attached plan. Essential terms

21. 4. See RJT Consulting Engineers Limited v DM Engineering (Northern Ireland) Limited [2002] EWCA Civ 270 but note that this position is likely to change under the proposed amendments to the HGCRA set out in the Local Democracy, Economic Development and Construction Bill published on 5 December 2008. 5. [2005] EWCA Civ 405. 6. More forbidden Latin: Id cerum est quod certum reddi potest. 7. [1987] 2 Lloyd’s Rep. 601. For a more recent decision summarising the law on this point see Aisling Developments Limited v Persimmon Homes Limited and Another [2008] ScotCS CSOH 1.

Offer and acceptance also requires agreement on terms that are essential to the bargain made. It is an important point to note that a contract will be formed if it can be shown that the parties reached agreement on the terms that they regarded as being essential, notwithstanding that other elements of the agreement may have been left over. Lord Justice Lloyd’s comments on this point in Pagnan SpA v Feed Products Ltd7 are worth setting out in full: It is sometimes said that the parties must agree on the essential terms and that it is only matters of detail which can be left over. This may be misleading, since the word “essential” in that context is ambiguous. If by

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“essential” one means a term without which the contract cannot be enforced, then the statement is true: the law cannot enforce an incomplete contract. If by “essential” one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by “essential” one means only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge, “the masters of their contractual fate”. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called “heads of agreement”.

Offer and acceptance in building contracts 22.

For the purpose of showing offer and acceptance in a building contract, it is usually said that there needs to be certainty of agreement in relation to work scope, price and programme. These three elements are normally regarded as essential terms in any building contract since without agreement on these points, a building contract is likely to prove unworkable. Note, however, that in certain circumstances, even the absence of agreement on price and programme will not prevent a contract from coming into existence if it is possible, on the strength of the parties’ agreement as to work scope alone, to imply a reasonable cost and time for completion pursuant to the Supply of Goods and Services Act 1982.

23.

In practice, in most cases the parties to a building contract will have regarded agreement on work scope, price and programme as being essential terms (where to have sought to enter into a contract without having agreed these elements, would, to say the least, be commercially imprudent). Thus for a building contract to be formed, as a minimum you would expect to see offer and acceptance that encompasses the work scope, the price (or a mechanism for fixing the price) and the timetable.

Part III: Has a contract been formed?

8. Trollope and Colls Ltd v Atomic Power Constructions Limited [1963] 1 W.L.R. 333.

24.

It is not usually necessary for the parties to have physically signed the contract document(s) if it is clear from the exchanges that the particular document or documents reflects their agreement. Thus, for example, the supply of electricity to your home will be regulated by the terms and conditions that the company posts to you, notwithstanding that neither you nor the company will have actually signed those terms and conditions. It would be very difficult to argue that the terms and conditions provided did not represent your agreement with the company.

25.

However, if the parties have, for whatever reason, not got round to producing a mutually agreed document (or set of documents), it will not be so easy to identify the point at which the parties reached agreement, if indeed they did at all (and equally difficult to identify the document or documents encapsulating that agreement). This is particularly the case with building contracts that are frequently the subject of extensive discussions over a long period of time, during which both sides will have exchanged documents such as specifications, conditions, amendments, schedules, etc. and revisions of same.

26.

It is trite law that if the parties eventually sign a contract, that contract will have retrospective effect8 but if the parties do not sign (or agree) such a document they may have different terms in mind as to price,

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works scope and other matters based upon their own perception of the numerous exchanges that have taken place. Alternatively, there may have been a point at which offer and acceptance on essential terms occurred, but the parties have not realised this (or have commercial reasons for wanting to avoid the contract or terms so agreed). 27.

A typical example would be as follows: (i)

Two years ago the employer invited the contractor to submit a tender for the works. A tender was submitted and was discussed through further negotiations between the employer and contractor conducted by means of meetings, telephone discussions, correspondence and emails. (The meetings were the subject of a minute but it was not verbatim, and the telephone conversations were not recorded at all.) At some point the negotiations tailed off, either because the parties assumed they had reached agreement on everything that was required and/or because they wanted to get on with the works. Whilst at all times the employer and contractor intended to complete a contract on one of the standard forms with the Articles signed, the Particulars filled in, the conditions amended by agreement and a detailed specification and set of drawings all marked “For Construction” attached as appendices, they did not get round to doing so.

(ii)

With the works almost completed, a dispute arises and each party advances a case based upon differing views as to what was agreed during the negotiations. Hence the question follows: We haven’t signed anything but do we have a contract and if so, what are the terms?

28.

This is one of those questions put to lawyers (and judges) that invariably provokes the response “Well, it depends”, and what the answer depends upon is the content of the written and verbal exchanges passing between the employer and contractor over the last two years. In circumstances where the parties have not signed a contract (or agreed a contract document), whether or not a contract has in fact been formed or particular terms agreed will depend upon an objective analysis of the entirety of the negotiations: the court’s task is to review what the parties said and did and from that material to infer whether the parties’ objective intentions as expressed to each other were to enter into a mutually binding contract. ... All negotiations should be considered. This is important, especially where there have been meetings at which oral statements were made showing that essential terms, not referred to in certain correspondence, were still awaiting agreement at the time of such correspondence.9

General principles 29.

The answer to the question posed in paragraph 27(ii) of this paper will be determined by reference to the particular facts of each case. Do these facts show that the criteria listed in Part II of this paper are satisfied, and if so, at what point was the contract formed? Although each case will turn on its own facts, the courts have developed some principles of general application, as follows: (i)

9. Keating on Construction Contracts Eighth Edition 2006 at paragraph 2-017.

The exchanges between the parties will be considered objectively and the words used given their ordinary and common sense meaning. Thus a party cannot rely upon what he thought he had written if that meaning is not objectively clear on the face of the

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document. Likewise, a party cannot rely upon points that, on the facts, were not apparently communicated to the other party. (ii)

Where the parties seek to rely upon competing sets of terms and conditions - the so-called “battle of forms” – as a general rule it will be assumed that the last set of terms and conditions to be tabled are those which will have been agreed if there is no further challenge to those terms. However, this general rule will not apply if it appears on the facts that the parties mutually intended some other result.

(iii) A contract will have been formed if a discernible offer can be shown to have been accepted by conduct, notwithstanding that acceptance is not otherwise communicated to the party making the offer. So if a contractor submits a tender for works at the employer’s premises and the employer arranges for the contractor to be allowed access to the premises to carry out the works without at any stage demurring from the terms of the tender, the offer, represented by the tender, will have been accepted by the employer’s conduct.10 (iv)

It does not ordinarily follow that no contract can possibly have been formed until the negotiations come to an end. If it appears on the facts that clear agreement was reached upon the essential terms at an early stage, the court may find that the subsequent negotiations varied the terms previously agreed or were simply irrelevant.

(v)

It will be difficult for a party to disavow contractual terms that, on the facts, they appear to have accepted and complied with throughout the course of the negotiations and the works.

(vi)

The court will be unlikely to find that a contract has been formed if the facts show that the parties had agreed that they would not be bound into an agreement unless and until a formal contract was agreed and signed. For example, where the preliminaries stated that there would be no agreement until the parties had entered into a Deed, and the parties did not enter into a Deed, the court would find that no contract had been formed.11 If the parties’ exchanges are labelled “Subject to Contract”, then this is likely to be taken by the court as an indication that they both intended that no agreement would arise unless and until a formal contract was completed.

(vii) It may be unnecessary to show offer and acceptance in precise terms where the parties have performed or largely performed the obligations that were the subject matter of their negotiations. In these circumstances the court will more readily conclude that an executory contract has come into being.12 (Note, however, that an executory contract will not come into existence if the parties have made it clear that a formal contract is a prerequisite, as per the previous paragraph.)

10. Brogden v Metropolitan Railway (1877) 2 App. Cas. 666. 11. Jarvis v Galliard Homes [2000] B.L.R.33. 12. The leading case on this point is G Percy Trentham v Archital Luxfer [1993] 1 Lloyds Rep 25, CA.

30.

This last point of principle is of particular relevance to building contracts. Albeit that negotiations may have been lengthy, there will usually have been a common understanding of what was required to be built, works will often have commenced before the contractual discussions have ended and the parties will have acted throughout as if there was a contract in place. In these circumstances, the court will be reluctant to conclude that no contractual relationship was entered into.

31.

However, bear in mind that whilst court may be predisposed to find that a

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building contract was formed at some point, that finding may not of itself resolve disputes over particular terms. Fitzpatrick v Tyco 32.

A good illustration of the court’s approach is provided by the case of Fitzpatrick Contractors Ltd v Tyco Fire and Integrated Solutions (UK) Ltd.13 The works in question comprised the refurbishment of the southbound bore of the Blackwall Tunnel. Fitzpatrick wanted to enter into a subcontract with Tyco for the design, manufacture and installation of the main M&E works in the tunnel. Subcontract negotiations commenced in October 2001 and continued until July 2002 but no formal subcontract was ever signed. Tyco commenced work during early 2002 but by August 2002 it seemed likely that disputes would arise between the parties over work scope and design delays. Fitzpatrick eventually submitted claims to Tyco for £19m, primarily comprising delay losses and in respect of incomplete and defective work.

33.

Tyco’s initial position was that no subcontract had ever been agreed. However, when Fitzpatrick issued proceedings, in their defence Tyco accepted that a sub-contract had been agreed on around 7 May 2002 but denied that some of the terms relied upon by Fitzpatrick were included within the subcontract. Mr Justice Coulson was therefore required to review the history of negotiations and decide when, or if, a contract had been formed and if so, on what terms.

34.

In his judgement, Judge Coulson made a number of findings applying the general principles listed above: (i)

When reviewing the document exchanges, he relied upon the ordinary meaning of the words used and did not agree with the interpretations put forward by Tyco which he concluded were, “contrary to commercial commonsense”.

(ii)

Judge Coulson found that the parties reached a basic agreement on the subcontract on 7 May 2002 whereby the identity of the parties, the price, work scope and programme were agreed (essential terms all), as was the incorporation of the main contract documents and the Civil Engineering Contractors Association Standard Form of Subcontract. Judge Coulson went on to find that the basic agreement of 7 May was varied as a result of subsequent discussions between the parties up to and including a meeting on 19 June 2002. (It is important to note that these subsequent discussions did not impact upon the essential terms agreed on 7 May.)

(iii) As both Tyco and Fitzpatrick agreed that a subcontract had been formed at some point, it was not necessary to lean too heavily on the decision in G Percy Trentham14 but Judge Coulson did dismiss an argument by Tyco that the parties had agreed that no contract would be formed pending the completion of a signed and sealed Deed. Judge Coulson found on the facts that the parties did not have a mutual intention that no legal relations would be created in the absence of a Deed.

13. [2008] EWHC 1301 (TCC). 14. See footnote 12.

(iv)

Judge Coulson noted that the case put forward by Tyco on the negotiations was not one they had advanced at any time prior to the commencement of proceedings, and further noted that Tyco’s case was wholly inconsistent with Tyco’s own contemporaneous documents.

(v)

Judge Coulson was particularly critical of the evidence of Tyco’s

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principal witness, finding that during cross-examination, this individual had provided answers that were, ‘explicable only on the basis that they advanced Tyco’s … case, rather than because they were in accordance with what he knew had happened’. It seemed obvious that Tyco were trying to retro-fit the facts to justify a subcontract agreement on more favourable terms. 35.

Judge Coulson’s overall conclusion was that Tyco’s case simply did not fit with the factual history of the negotiations: I consider that, on analysis, Tyco’s … case is unsustainable. It is made by reference to one witness only, whose oral evidence is not only uncorroborated but, in my judgment, lacking credibility. It is contradicted by and/or wholly inconsistent with the contemporaneous documentation. It relies on an interpretation of the Letter of Award which is artificial and convoluted and requires deletions and modifications to the words used.

36.

As said, each case will be decided on its own facts, but Judge Coulson’s judgment confirms that parties will face great difficulty in seeking to impose contract terms that they, with the benefit of hindsight, would have liked to have agreed, rather than those that they actually did agree.

Part IV: Letters of Intent 37.

Issues of contract formation are of particular relevance to letters of intent. The question of whether or not a contract has been formed by means of the issue of a letter of intent will be addressed by applying the criteria listed in Part II of this paper. For example, a letter of intent that says little more than that the employer will at some stage award the contractor a contract for works as yet unspecified is unlikely to give rise to binding contractual obligations for want of consideration and certainty, amongst other things.

38.

However, Letters of Intent issued in connection with building contracts are usually more substantial. In particular, Letters of Intent issued to contractors usually have the object of getting the initial stages of the works under way whilst contractual negotiations continue and as such, the initial works required and the amount to be paid for these works will normally be set out in some detail in the Letter of Intent or in appended or referenced documents. A Letter of Intent that contains sufficient detail of the works, the price to be paid and a start date can give rise to a binding contract and a contract will be formed if the terms offered in the letter are accepted by the contractor.15

39.

Thus, whether or not a Letter of Intent does create a contract will (again) depend on the facts of each case and, in particular, the wording of the Letter of Intent.

Part V: Summary

15. See for example ERDC Group Limited v Brunel University [2006] EWHC 687(TCC).

40.

Disputes over building contract formation feed on uncertainty. A building contract document that has been signed (or unequivocally endorsed), by both parties in advance of the commencement of the works might be said to be something of a chimera, but this scenario is far less likely to give rise to disputes. Where there is uncertainty, it will be easier for the parties to dispute the existence of or the terms of the contract in the hope of gaining a commercial advantage or avoiding obligations that, with the benefit of hindsight (with the works under way), have become excessively onerous. Resolving such disputes is likely to prove timeconsuming and expensive.

41.

The obvious conclusion therefore is to make sure that your contractual

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arrangements are free from doubt. Avoid loose ends and, above all, do your level best to get the other party to sign the contract or in some way confirm in writing that the terms you think have been agreed, have been agreed. Ted Lowery 17 April 2009