Get your contract in place

In Iliffe and Another v Feltham Construction Limited and Another, the Technology and Construction Court (TCC) considered the principles relating to contract formation in the context of an application by the claimants for summary judgment in respect of their claim for damages to be assessed and for a substantial interim payment.

The factual background

On 20 April 2012 a fire, which started in the roof, destroyed the claimants' property during the course of its construction and when it was almost complete. The claimants claimed damages in excess of £3,500,000 from the defendant, Feltham Construction Limited (Feltham) as a result.

It was envisaged from the outset that the claimants' house would be constructed in three phases, and a contract incorporating the standard form JCT Intermediate Building Contract with Contractor's Design 2005 (Revision 2, 2009) conditions was eventually entered into for the Phase 1 works. No contracts were concluded for the Phase 2 or the Phase 3 works, although an "email of intent" for part of the Phase 3 works was issued to Feltham by the claimants' architect on 5 July 2011 (the architect's email) in response to Feltham's tender dated 28 June 2011 for part of the Phase 3 works.

The claimants and Feltham proceeded and conducted themselves, however, as if the terms of the standard form JCT contract also applied to the Phase 3 works and that a contract incorporating them was in place.

The issue - was there a contract?

In the proceedings Feltham argued that there was no written contract between it and the claimants for the Phase 3 works and that it did not have any contractual obligations to the claimants beyond placing an order with a sub-contractor, Affleck, for the installation of the wood burning stove (which allegedly caused the fire). It was therefore, it said, not liable for the losses caused.

Contract formation - the applicable principles

In determining that there was indeed a contract, Mr Justice Stuart-Smith applied the following principles:

• The question of whether a contract has been concluded is to be determined objectively.
• If a contract has been concluded, the subsequent conduct of the parties may be very relevant to the enquiry regarding whether a particular term was actually agreed.
• The legal principle that the subsequent conduct of the parties cannot be relied on as an aid to the construction of a contract has no application when considering whether an alleged term of a contract was, in fact, agreed.
• Where there is no written contract, any contractual consensus must have involved either (i) an oral statement of offer or acceptance or (ii) conduct which, viewed objectively, demonstrates that consensus has been reached.
• Conduct will only amount to acceptance if it is clear that the alleged act of acceptance was done by the offeree with the intention, objectively considered, of accepting the offer. 
• A contract requires sufficient certainty about necessary terms. A lack of certainty about peripheral matters need not prevent the formation of a contract.
• A court may hold that the contract includes implied as well as express terms where the nature of the contract and its established terms justify such a finding.
• Where it is claimed that an offer or an acceptance or both have been made by conduct, the terms of the agreement are more difficult to ascertain than where the agreement is in writing. In these circumstances the difficulty may be so great that the court can only conclude that no agreement at all has been reached.
• The court can sometimes resolve the uncertainty as to what, the terms of an agreement negotiated by conduct are by either (i) applying the standard of reasonableness or (ii) by reference to another contract - between the same parties or between one of them and a third party - or to a draft agreement which had never matured into a contract.
• Where work has been carried out and has been paid for, the court will carefully scrutinise any suggestion that there was in fact no contract. This is because as the transaction was performed on both sides it makes it unrealistic to argue that there was no intention to enter into legal relations.
• Essentially, the same considerations apply to the determination of whether a letter of intent has contractual effect.
• A letter of intent by itself is capable of giving rise to a free-standing contract which is separate from the projected contract. Therefore, although the fact of a letter of intent will generally show that a projected contract has not yet been concluded, that is not always the case, and it also does not follow that when services have been performed pursuant to a letter of intent that they are subject to no contractually binding obligation at all.

The court's decision

On the facts, Mr Justice Stuart-Smith concluded in relation to the contract formation issues that:

• The intention of the architect's email of 5 July 2011 was to give a binding instruction to Feltham to carry out the works; and the instruction in the email gave sufficient certainty for the conclusion of a contract.
• There was an acceptance of Feltham's tender dated 28 June 2011 for part of the Phase 3 works.
• The contract concluded by the architect's email incorporated the standard form JCT Intermediate Building Contract with Contractor's Design 2005 (Revision 2, 2009).
• The judge would have rejected any suggestion (had it been made) that Feltham carried out the Phase 3 works without there being any contract in existence at all.

The consequence of these conclusions by Mr Justice Stuart-Smith was that Feltham was liable to the claimants. Their claim for in excess of £3,500,000 in damages would be assessed later by the court if not agreed beforehand.

Commentary

This decision illustrates and emphasises the importance of ensuring a formal contract is in place before any works are carried out. Had the claimants and Feltham signed a formal written contract before the Phase 3 works giving rise to the claim were carried out, the TCC would not have been required to undertake the time consuming and expensive exercise of considering and deciding these points.

What the judge did not address in his judgment - because he did not need to do so on the facts - was the consequences on the claimants' claim of a finding that there was no contract at all with Feltham for the Phase 3 works. If the judge had found that there was, in fact, no contract between them then the claimants' claim in contract would naturally have failed. The effect of this could have been profound.

Key points

• Although there are sometimes good reasons to start work on a construction project in advance of the finalisation of the contract documents, having a signed contract in place increases certainty and minimises risk.
• Without a formal signed contract, disputes between the parties to the purported contract can (and frequently do) arise which require a court (or adjudicator, arbitrator etc) to decide whether or not the parties to the dispute have contracted with each other and, if so, on what terms.
• The resolution of such disputes is invariably time consuming and expensive.
• While the applicable legal principles are well-established, the factual background in each case is always highly relevant and the application of the relevant legal principles to the facts means that the outcome in any given case can never be guaranteed in advance.
• If a court finds there is no contractual relationship at all between the parties to a claim then there can of course be no claim for breach of it, and this could have significant consequences. Nevertheless, an employer may still be liable to a contractor for the payment for any works it has properly carried out.