Contracts are often the last thing to be checked before work begins – and sometimes they don't get checked at all. The result can be that parties sometimes need m'learned friends to tell them whether they exist at all.
Have you noticed how we seem to have at least one case on contract formation every year? Given that we are all supposed to be assessing contracts in terms of their optimum risk allocation and exploring the possibilities for cost savings in the industry, surely this is an area where some useful work could be done.

The problem is, of course, that in the nice, clean world of the academic textbook, the parties follow the usual rules of offer and acceptance, and agree all their contractual terms fully and clearly. They are not supposed to leave any gaps where risk allocation is poorly defined, or where the various documents forming the contract do not fit together properly.

The reality is very different. Parties are under pressure to get on with the job and, at the same time, minimise costs expended on purely speculative ventures. Consequently, while important tasks such as finalising the price and scope of the works are completed, jobs such as cross-checking the contract documents for consistency and clarity tend to get left until last.

As a result, parties may find themselves disagreeing about whether there is a contract at all and, if there is, exactly what it says. Given the enormous variety of commercial situations that arise, each case has to be decided on its own facts. Every now and then, however, the court tries to provide guidance by formulating some basic principles. For example, in the case of Pagnan SpA vs Feed Products Ltd,¹ the court suggested the following guidelines:

  • You have to look at the correspondence between the parties as a whole.

  • Even if the parties seem to have reached an agreement on all the terms of the proposed contract, they may still not intend that the contract be binding until some further related events have taken place or other conditions have been fulfilled (the ordinary "subject to contract" scenario).

  • On the other hand, they may intend the contract to become binding only when other terms have been agreed.

  • Conversely, the parties may intend to be bound straightaway even if there are further terms to be agreed or some further formality to be fulfilled.

  • If the parties fail to agree on any such further terms, the existing contract will not be invalid unless the failure to reach agreement on those terms makes the contract as a whole unworkable or too uncertain.

  • The parties may be able to agree on "essential terms" only, leaving matters of detail to be dealt with elsewhere.

    There is a great deal of case law on that last point alone. There probably has to be some agreement on the absolute basic minimum required to make an agreement workable. This basic minimum is usually thought to be the identity of the parties, the price, the time within which the works are to be carried out and a description of the works themselves.

    Having said that, failure to agree price or time may not in itself prevent the contract coming into existence, because these may be implied by the Supply of Goods and Services Act 1982. It is also possible that subsequent agreement of the relevant terms can create a contract that applies retrospectively to "pre-contractual performance". So, for example, in Trollope & Colls Limited vs Atomic Power Constructions Ltd, a contract that came into existence on terms finally agreed in April 1960 referred back to work that commenced in June 1959.²

    Further confusion arises when you try to draw a distinction between whether an agreement has been reached and, if so, what the terms of that agreement are. Evidence of the negotiations between the parties is admissible to prove the first point but not the second. In practice, however, it is difficult to see how the two can be separated and, very often, both questions end up being asked and answered at the same time. In VHE Construction Ltd vs Alfred McAlpine Construction Ltd, the negotiations between the parties continued over a period during which time the court found that the contract had actually been concluded and that the discussions that took place were in fact disagreements over the effect of what had already been agreed.³

    However, in J Murphy & Sons Ltd vs ABB Daimler-Benz Transportation (Signal) Ltd, the court decided that the parties had failed to agree on certain material terms relating to price.4 The same point arose in VHE but, in that case, the court found that a contract had been agreed.

    To summarise, if you find yourself disagreeing about contract formation, you are not going to be able to predict the outcome with any great degree of certainty. Is there a way to reduce the substantial amount of time and money spent in arguing these points? Here are a few suggestions (aimed mainly at employers, although contractors should consider this issue as well):

  • Try to allocate sufficient time and resource to consider the contract and the interlocking relationship of the legal and technical elements. In other words, try not to leave any gaps.

  • Give someone or a group of people in your organisation responsibility for reviewing and/or drafting the contracts (or amending standard form contracts). You could even use a lawyer.

  • Check the contract conditions before you send them out with the tender and, importantly, before you conclude the contract.

  • Try to come up with some guidelines to limit the occasions when you allow work to start on site before the contract has been concluded. This may be unavoidable in some circumstances, but not too many.

    These are not the only answers, nor will they provide a complete solution. It just seems to me that some of the time and effort spent arguing about this issue could be used to improve the position instead.


  • Leave time to consider contracts properly, and don’t leave gaps
  • Check contract conditions before signing
  • Limit occasions when work starts before contract is concluded