Surprise!

With the best will in the world it can be difficult to get a contract agreed and signed. So often, the need to get the job done means that work starts before terms can be finalised. Key issues, such as the dates of commencement and completion and the amount of liquidated damages, will usually have been set out in the tender documents, but the fine print can take weeks, if not months, of wrangling and is sometimes never agreed.

Without an executed contract document, it can be a nightmare to work out if there was ever a contract and, if so, what its terms might be. The courts usually take a pragmatic view of this situation, and if the works have been carried out will often go the extra mile to find agreement. The trouble is, unravelling the threads of correspondence and discussions can produce unpredictable, even bizarre results. The recent case of Motherwell Bridge Construction vs Micafil Vakuumtechnik exemplifies the sort of mess that parties get into, and the lengths to which the court will go to get them out.

Micafil engaged Motherwell Bridge as a subcontractor to construct an autoclave for the making of power cables. Negotiations began in 1995, and continued into 1998. There were references to the subcontract being on FIDIC terms (though FIDIC did not produce a subcontract at the time) and, in August 1997, Micafil wrote to Motherwell Bridge saying that it had been awarded the subcontract, "conditional upon … both parties signing the formal contract consolidating all necessary commercial, technical and operational requirements …" In fact, no formal contract was ever executed.

Disputes arose, not least as to whether, and if so when, a binding contract came into being. The timing was important because there were numerous changes to the detailed design. Broadly speaking, if the changes were made before there was a contract, then they would have been included in the scope of works, and hence the price. Otherwise they would have been variations, in which case Motherwell Bridge would be entitled to a lot more money.

The court concluded that a contract was formed by correspondence and discussions, culminating in the August letter quoted above.

Strangely, Micafil could not rely on their August letter to prevent a contract coming into being, but Motherwell Bridge could have used it to obtain a court order compelling Micafil to sign a formal contract. Although the result may have done justice in this case, it comes as a surprise, given the wording of the letter, and it is a warning for anyone using similar wording under the impression that it will give rise to a letter of intent rather than a concluded contract.

The finding was based on the conduct of the parties and perhaps even on a reading of their subjective intentions. If this reasoning is to be applied generally, it will extend the parameters of existing case law and the price to pay for that is uncertainty – which, when the costs of a trial are considered, could be a high price indeed.

Another point is that the FIDIC terms did not apply in full, not least because they did not fit the relationship of subcontractor and main contractor. However, it was held that the parties agreed to abide by "the spirit of the FIDIC terms". In this case, it meant that Motherwell Bridge was entitled to claim extensions of time on grounds available under the FIDIC conditions, but it did not have to comply with FIDIC's procedural time limits. It is hard to conceive of a more nebulous concept than "the spirit" of a standard form contract.

If it is not to be seen as confined to its own particular facts, the decision could have wide implications. How often do parties agree to carry out works "on the JCT form" or "in accordance with the ICE conditions"? Sometimes it is clear which version is referred to, but not always. In such cases, will they be bound by the "spirit of the JCT" or the "spirit of the ICE"? If so, the price to pay will, again, be uncertainty in determining their contractual obligations and entitlements.

Many lessons can be drawn from this case. Not least, the lengths the courts will go to to create contractual relationships where works have been carried out and the bare minimum of key terms are agreed. But perhaps the most important point is the need to ensure that contracts are signed.