When contract formation puts you in a bind

Issues regarding the formation of contracts keep on arising in the courts. Helen Stuart and James Butters at Trowers & Hamlins describe two recent cases that provide a useful reminder of some of the established principles.

To constitute a binding contract the following have to be established:

• Offer;
• Acceptance;
• Consideration;
• An intention to create legal relations; and
• Certainty of all material terms.   

Construction contracts do not have to be set out in writing, they can be made orally, partly orally and partly in writing or even by the conduct of the parties, providing the above crucial elements are found to exist. Indeed, under the amendments to the Construction Act, parties to oral “construction contracts” now have the right to adjudicate any dispute arising under them.

In the case of MacInnes v Gross no less than €13.5m (£11.7m) was claimed based on an alleged oral contract made over dinner in a Mayfair restaurant. The dinner was followed up by an email referring to “headline terms” of agreement.

The court dismissed the claim that there was a binding contract. In doing so, it considered the following points:

• Whilst contracts can be made anywhere and in any circumstances, where they are alleged to have been made in a highly informal and relaxed setting, the court will closely scrutinise whether there was an intention to create legal relations.
• Where there is an express agreement in an ordinary commercial context the burden of disproving an intention to create legal relations “is a heavy one”.
• Where there is no express agreement the party claiming the obligation carries the burden of proof.
• The contemporaneous documents strongly indicated that there was no intention to create legal relations. 
• Vagueness may be a ground for not accepting an agreement exists at all. 

The court also went on to conclude that the terms of the alleged contract were both too complex and too uncertain to be enforceable. This was because it could not determine what remuneration would have been payable in any event.

Furthermore, the scope of services to be provided was unclear, along with the identities of the parties alleged to have entered into the contract. However, the court stated that it could have considered a claim for quantum meruit for the services provided, based on their market value, as the defendant had benefited from services provided by the claimant.

Parties should therefore take care when discussing possible terms of a contract, whether formally or informally. Formal communications concerning possible contract terms should be stated to be “subject to contract”. Whilst including such a term is not conclusive, there will be a strong presumption that it evidences the parties’ intentions.

A casual meeting may not constitute a contract

Contemporaneous records should be kept of any informal discussions to evidence that there was no intention to reach a contractual agreement.

Ideally no services or works should be undertaken until the contractual position has been formalised. If they are, even if no contract is found to exist, there will be a risk that the professional or contractor will be entitled to the market value of the services or works provided. In such circumstances properly drafted letters of intent should be used as a stop gap whilst negotiations are ongoing.

In the second case of Teekay Tankers Ltd v STX Offshore & Shipbuilding Co Ltd the court considered an option within an existing contract which provided for the delivery dates to be “mutually agreed” and for the shipbuilder to use “best efforts” to have a delivery within 2016 for certain vessels and 2017 for the rest.

It found that the option was unenforceable on the grounds that the material term as to delivery was too uncertain, notwithstanding that the parties had clearly intended the agreement to be binding.

The court did strive to give effect to the parties’ agreement. However, it could not imply either, in effect, a unilateral delivery date by the shipbuilder where the words referred to it being “mutually agreed”, or that delivery could be within a reasonable time, when the clause referred to the shipbuilder using “best efforts” to ensure delivery within certain years.    

Where a binding contract is intended, as ever, parties should ensure that the agreement reached is fully and properly documented and the essential terms of the contract are agreed in full. In a construction context, as a minimum, agreement should be reached as to the parties, price, scope and a completion date or programme.

The cautionary tale from these two recent cases is that where care is not taken in discussing terms or documenting the agreement reached a lot of time and money can be wasted in arguing over whether there was a binding contract at all and, if so, what its essential terms were.    

Helen Stuart is a senior associate and James Butters is a trainee solicitor at Trowers & Hamlins

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