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It is common practice for parties in the construction industry to undertake work under a letter of intent before the contract is formally executed. This practice ensures that design can be undertaken, materials can be procured, the site can be prepared and, ultimately, work can begin notwithstanding ongoing contractual negotiations. However, letters of intent often form the basis of disputes and their contractual status can be unclear. For example, letters of intent have been:
Uncertainty, and with it disagreement, is plainly likely when contractors perform work in anticipation of a final contract that is never formally executed. That was the case in RTS Flexible Systems v Molkerei, where the employer sent a letter of intent containing a draft contract. It also contained a “subject to contract” clause which stipulated that the terms within the letter of intent would not be binding unless executed by both parties, which it was not. The Supreme Court held that the parties had nevertheless entered into a binding agreement: on the evidence, the parties had agreed to waive the “subject to contract” requirement.
The recent case of Anchor 2020 Ltd v Midas Construction Ltd raised similar issues to RTS but will be of particular importance to the construction industry, not least because the contract in question was a JCT Design and Build Contract, 2011 Edition.
Anchor had intended to employ Midas to construct a retirement complex at Yateley, Hampshire under an amended JCT Design and Build Contract, 2011 Edition. The parties were not able to agree the final contract before the start date and the works were carried out over a series of letters of intent, the last of which was expressed to expire on 30 June 2014.
On 21 July 2014, Midas signed off on the JCT terms and novation agreements. It also appended a risk register that purported to exclude certain elements from the scope of works. Anchor disagreed with the inclusion of the risk register and did not countersign the contract. The issue of the risk register was not resolved, but Midas nevertheless carried out the works.
A substantial final account dispute arose between the parties and the TCC was tasked with determining the contractual basis of the relationship as defined by five preliminary issues. Anchor argued that a binding contract was made on the 21st of July 2014. Midas, in order to support a claim for a quantum meruit, denied there was such an agreement on the basis that Anchor had never executed the JCT.
Waksman J found that there was a binding contract on the essential terms of the JCT agreement. In his judgment, Waksman J applied RTS Flexible Systems and cited Lord Clarke’s judgment:
“The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”
This means that the fact that the contract was intended by both parties to be signed, as indicated by the presence of a signature field, and from Midas seeking signatures from Anchor from time to time, was not conclusive against a binding agreement in circumstances where those signatures had not been given. Indeed, RTS showed that even when a written agreement intended to be executed by both parties expressly requires a signature, the lack of a signature is not conclusive against their being bound.
Waksman J found that Midas must have accepted it was entering into a contract at the point of its signature because it always insisted on a contract being in place, plainly considered there was one in place when it signed, and would not have continued to perform under the JCT terms until practical completion if it did not consider it was bound to do so.
The evidence showed that many essential terms of the contract had already been agreed between the parties. The only reason Anchor had not signed the contract was because the issue with the risk register had arisen. This did not show that there had not been a contract between the parties in respect of the terms (and specifically the payment terms) of the JCT. Waksman J rejected the submission that the inclusion of the risk register was a counter offer from Midas and held that, even if there was a difference in substance created by the risk register, it was consistent with Midas seeking a variation.
It followed that on an objective assessment of the parties’ communications and conduct, they had intended to be bound on 21 July 2014 at the point of Midas’ signature and the payment provisions of the JCT applied.
This being decided, there was no need for the court to consider the arguments in respect of quantum meruit. Nevertheless, Waksman J provided instructive obiter guidance on what he would have decided. In short, Waksman J found he would have decided any quantum meruit claim on the basis of the payment provisions of the JCT, notwithstanding the fact that any quantum meruit analysis necessarily assumed the parties had not agreed that those terms would govern their relationship.
Just as was the case in RTS Flexible Systems, it is clear from Anchor v Midas that a lack of execution by one or both parties will not necessarily mean they have not reached a binding agreement.
Both cases demonstrate that, especially where there has been substantial performance by the parties, the courts will not be constrained by technical arguments as to the subjective intention of the parties for their actions to be governed by a legal relationship.
Moreover, Anchor v Midas highlights the difficulties involved when letters of intent expire prior to the finalisation or execution of the anticipated contract: “a move from a contractual to a non-contractual” arrangement.
Clearly where there is an interim contract under which a party is performing and a final contract that has not yet been agreed, it is possible for the parties to be in a binding contractual relationship on an interim basis while negotiations are ongoing or where there has been a failure in execution. What terms of the putative final agreement are incorporated into the interim agreement will be a question of fact for each case (see Arcadis v AMEC).
Where a letter of intent expires, as in Anchor v Midas, and no subsequent contract is executed, then there is a potential contractual lacuna. While the parties’ continued performance will often indicate that they continued to be bound by a contract, there remains the more difficult question as to what the terms of that contract would be. In circumstances where the terms of the interim contact and the putative final contract differ, the answer to this question is fertile ground for disputes.
It is interesting to contrast Anchor v Midas with last year’s wellknown Supreme Court decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd.
In that case, overturning the Court of Appeal, the Supreme Court found that it was possible for the parties to bind their hands as to the form of future variations to their agreements. Giving the leading judgment, Lord Sumption cited with approval the comments of Longmore LJ in North Eastern Properties Ltd v Coleman:
“If the parties agree that the written contract is to be the entire contract, it is no business of the courts to tell them that they do not mean what they have said.”
Therefore, is it not a starkly different approach for the courts to suggest that parties can be bound when they were ostensibly proceeding on the basis that they would not have an agreement unless it was signed by both parties (as was the case in RTS)?
The clearest distinction is to be found in the fact that one situation concerns the pre-contractual understandings of the parties, the other their agreed, post-contractual liberties. As Lord Sumption put it:
“Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.”
This means that where the parties have agreed to a constraint on their abilities, the courts will generally enforce it. It is an entirely different issue to ask whether the parties have agreed at all and, if so, what are the terms of that agreement. When addressing the latter question, it is abundantly clear that the courts will not take the word for it: they will assess the question from an objective, uninterested perspective. Practically it seems there is still great value in Lord Clarke’s (now nearly a decade old) warning in RTS Flexible Systems of the:
“… perils of beginning work without agreeing the precise basis upon which it is to be done. The moral of the story to is to agree first and to start work later.”
This advice is all the more pertinent given Waksman J’s obiter comments in Anchor v Midas to suggest that parties between whom there is no binding agreement may nevertheless find themselves in effect bound by the very terms they had failed to agree.
This article was first published in JCT News.
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