Starting on site without a contract can have major consequences. The more work that has been done and the more issues arising as a result, the harder it will be to get one signed off

James Bessey

A lot of case law concerns whether parties have or have not agreed a contract and, if so, on what terms. The latest two examples are Spartafield Ltd vs Penten Group Ltd and Arcadis Consulting (UK) Ltd vs AMEC (BSC) Ltd. The judgments, made in October, were handed down and reached different conclusions on the facts of each case, illustrating that these decisions often involve a mixture of detailed factual material and legal precedent.

In Arcadis, the contractor started work on Castlepoint Car Park, Bournemouth, under a letter of intent. Negotiations continued over the main contract but it was never agreed. At one point, three sets of terms and conditions were in play, some of which referred to a liability cap. Arcadis claimed the contract was evidenced in correspondence and a cap on its liability had been contractually agreed. The judge disagreed. He found the terms and conditions had constantly been amended and never ultimately agreed. In particular, the cap Arcadis wanted had not been agreed and could not be brought into the letter of intent. Arcadis’ liability remained unlimited and not subject to any cap.

In contrast, the decision in Spartafield was that, although the Joint Contracts Tribunal (JCT) contract had not been formally executed, an amended JCT contract had been agreed as objectively it included all the essential terms the parties required. The JCT contract was found to supersede the parties’ letter of intent.

Whether a full or complete contract has been agreed has various implications.

Of course, circumstances will vary. However, some positions argued by parties about the existence of a contract are pertinent to construction and crop up time and time again.

If there is no express contractual right to terminate because of insolvency, you will have to wait until you can establish the contract is not being performed

One issue is that letters of intent often have a limited scope or value. There are unwanted consequences when, for instance, a key part of the supply chain becomes insolvent and the contractor wants to walk away or renegotiate. If the contractor is under a full contract, it is bound to do the works.

Another is contractor insolvency. A full, formal contract usually includes detailed provisions that allow no further payment to be made, the contract to be terminated and an account to be drawn up after the works have been completed by others.

A letter of intent or exchange of correspondence type of contract may make no such provision. The employer may be forced to pay for work done rather than be entitled to hold on to that money until an account is drawn up later.

Insolvency is, perhaps surprisingly, not a breach at common law. You need an express contractual right to terminate because of insolvency or you will have to wait until you can establish that the contract is not being performed.

A formal contract may also contain provisions entitling the employer to call for the assignment of the benefit of subcontracts and supply contracts in the event of insolvency or termination. Letter of intent or correspondence contracts are unlikely to contain such details.

Performance bonds and guarantees may also only be triggered by “breach” rather than insolvency or on termination, making a claim under any security obtained difficult. Perhaps oddly, it is not uncommon to see a bond signed off and provided even though the contract to which it relates has not been finalised or fully agreed.

Provisions that might be thought of as routine in a contract may be missed (inadvertently or otherwise) from a letter of intent or exchange of correspondence: Ampleforth Abbey Trust vs Turner & Townsend Project Management Ltd [2012] offers a salutary lesson here.

All works were carried out under a series of letters of intent. The works were delayed and the employer was unable to claim liquidated damages for delay from the contractor because the letters of intent contained no liquidated damages provisions. The employer successfully pursued the project manager for the losses arising because the latter had taken insufficient steps to procure execution of a formal building contract.

It may also be important to get a contract executed as a deed. This will give a longer limitation period of 12 rather than six years.

As long as serious commercial implications of not concluding a full formal contract remain, cases such as Spartafield and Arcadis will continue to occupy the courts. In practical terms, the more work that has been performed and the more issues that have arisen, the more difficult it will be to get the contract signed off: a stitch in time?

James Bessey is a partner at Blake Morgan