In recent years, the key question of the parties' intentions has been overlooked by the courts, which have strained to find that a contract can be formed where the key terms are agreed, even though it is often clear that at least one of the parties did not believe there was a contract.
This uncertainty can cause problems. Is the contract formed when the final draft is initialled and signed by both parties, or earlier, when all the key terms were agreed and the parties shook hands believing the "deal" had been done? And if one party, believing there to be a contract, acts to its own detriment, will the other party be "estopped" or precluded from subsequently denying the existence of the contract?
Issues like these were considered recently in the case of McNicholas Construction (Holdings) Limited (MCHL) vs Endemol UK. Endemol was the producer of the BBC programme Fame Academy. The series required a venue where contestants could live, be coached and televised. MCHL was the owner of a property that Endemol had identified as suitable.
During the summer of 2002, the parties negotiated the use of the property. Draft agreements were sent out and the parties met to discuss the drafts. Although there was a large measure of agreement on the draft, certain points were not agreed. At the end of the meeting, the parties shook hands.
Meanwhile, unbeknown to MCHL, Endemol had found a more suitable property and started negotiating with its owners. Mindful, however, that a deal for that property was a long way from being concluded, Endemol did not mention this to MCHL but continued acting as if it was intending to contract with MCHL for its property. MCHL, so it subsequently claimed, started to act to its own detriment in the belief there was a contract with Endemol.
MCHL stopped marketing the property for sale, and began preparing it for Endemol. Despite the fact that MCHL believed the deal to be done, it continued to negotiate the terms of the draft contract with Endemol and, eventually, MCHL signed and sent back the ninth draft of the contract in early August. But Endemol had by this time chosen to take the alternative property and pulled out of the deal with MCHL.
MCHL was furious and brought the matter before the court. It contended that a contract had been concluded with Endemol either when the parties had shaken hands in July, or alternatively at the later date when MCHL had signed and returned the draft agreement. Further, MCHL argued that even if a contract had not been concluded, Endemol was "estopped" or precluded from denying that there was any such agreement. MCHL had acted to its detriment in a mistaken belief there was a contract.
It is refreshing that a judge has not strained to find a contract where clearly there was none, and has considered the parties’ own intentions
The judge felt considerable sympathy for the position MCHL had found itself in. However, there was confusion as to what the handshake had meant. Whereas MCHL contended that when the parties had shaken hands, they had concluded a deal and that the MCHL representative had mentioned that "his word was his bond" as they shook hands, Endemol denied this and contended that the handshake was no more than normal courtesy. Despite his sympathy, the judge did not accept that the handshake concluded a deal because he said there were unresolved issues at that stage and thus the agreement was too uncertain to be binding, based on the handshake alone.
Neither did the judge believe that the signing of the draft contract and sending it back constituted an acceptance by MCHL of an offer by Endemol, thereby concluding a contract.
The fact that the document was described as a "draft in progress" meant that it could not have represented an offer that was capable of acceptance by MCHL. Further, when the draft was signed by MCHL, it had made some further amendments to it that meant that, at best, it would amount to a counter offer, which had not been accepted by Endemol anyway.
Finally, with regard to the estoppel argument, the judge found there had been no representation by Endemol that there was a contract and that the parties were merely in the normal pre-contract state of affairs. A party that relies on a hope that terms will be agreed and a contract entered into has no redress when this is not, short of actions actually based on misrepresentation.
It is refreshing that a judge has not strained to find a contract where clearly there was none, and has considered the parties' own intentions. It was clear, on the evidence, that the parties were working towards a signed contract. Only then would they both believe they were "in contract". This is often the case but seems rarely to be taken into account by the courts.
It is quite possible for the parties to be agreed on all key terms but not be in contract because, to be frank, one or other does not wish to be. In this case, Endemol quite clearly did not want to be in contract since it was negotiating with another vendor at the same time. A dangerous game to play, perhaps, and in the end Endemol was thankful for the good sense of the judge – next time it may not be so lucky.
Nick Henchie is a partner in Mayer Brown Rowe & Maw LLP's construction and engineering group.