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Pitfalls of work done without a formal contract

Letters; Everyone wants to get the job done, but proceeding without a contract can backfire, writes Daniel Atkinson

IT OFTEN happens in construction that the pressing need to get on and complete the work leaves behind the completion of the contractual arrangements.

Frequently, subcontract works are completed without formal agreement, raising the question of whether there was a contract at all.

Such was the background to the recent case of Hescorp Italia v Morrison and Impregilo (2000).

The parties had started negotiations for a subcontract to design and erect structural steelwork. Both declared an intention to enter into a formal contract in the form of a deed, but Hescorp started production of steelwork in October 1998 without agreement. There was a 'pre-order meeting' in which pre-printed minutes were annotated, showing matters such as programme and liquidated damages were still to be agreed.

On January 25, 1999, Hescorp started work on site. On the same day the main contractor, a joint venture of Morrison and Impregilo, issued a 'subcontract order' which Hescorp was asked to sign and return. It failed to do so, but work continued.

On April 20, 1999, the subcontract work was completed without a formal contract. Discussions continued and Hescorp returned the subcontract order with amendments. The joint venture rejected the amended order and issued another. Inevitably disputes arose on the amount due for payment.

Eventually Hescorp applied for summary judgment and/or an order for interim payment. Hescorp claimed £397,025.14 as the value of the work it had done without a contract.

Morrison insisted there was a contract, although not of the formal type anticipated, and claimed the contract price was £362,500.00. It counter- claimed £276,945.81 as damages for delay together with estimated damages of more than £100,000 it might have to pay in turn to the client.

Judge John Hicks set out thefamiliar law relating to the formation of contract and reminded the parties that the legal consequence of negotiations recorded in documents are to be resolved primarily by interpreting the documents in their factual setting.

The wishes and intentions of those participating and their beliefs as to the meaning of documents are irrelevant, except where shared knowledge at the time may be part of the factual setting.

Judge Hicks reviewed the decision of the Court of Appeal in Pagnan v Feed Products (1987) and extracted six key principles of law (see Key points). He applied these to the Hescorp case, with specific reference to two issues.

The first was the requirement stated by the parties that the subcontract should be in some specified form, in this case a deed.

This requirement can mean that, until so embodied, the contract is not binding. Or it can mean that, if a binding contract is entered into without the specified formality, one of its terms will be that it shall be embodied and executed in the appropriate form.

Deciding which meaningapplies involves deciding the common intention of the parties and, if that is expressed in a document, the true construction of that document.

The second issue was the alleged agreement on terms for the date of completion and the level of liquidated damages. Judge Hicks found there was never agreement on both simultaneously.

The negotiations had developed into a dispute over the establishment and quantification of a claim by Hescorp for delay. Both parties understood this and both regarded the completion date as an essential term requiring to be settled if there were to be a contract.

Applying point 6 (see Key Points), Judge Hicks held that the joint venture had no real prospect of establishing that a contract was entered into. Hence Hescorp was entitled to summary judgment and entitled to be paid a reasonable sum for its work.

Since there was no contract, the joint venture could not pursue its counterclaims.

This appeared settle it, but the joint venture raised a defence against payment of a 'reasonable sum', which proved crucial. It said the value of Hescorp's work should be reduced to reflect delays and defects.

But Judge Hicks held that, since a claim for a reasonable sum isinherently unliquidated, Hescorp was not entitled to summary judgment for any specified sum of money. Hence, the joint venture's defence was accepted and Hescorp, which had seemed so close to succeeding, was defeated.

This and other articles written by Daniel Atkinson for Construction News can be found at the James R Knowles website:www.jrk-lawyers.com

Key points

To determine whether a contract has been concluded incorrespondence, one must look to the correspondence as a whole.

Even if the parties have reached agreement on all the terms of the proposed contract, they may intend that it shall not become binding until some further condition has been fulfilled.

The parties may also intend that the contract shall notbecome binding until some further term or terms have been agreed.

Conversely, the parties may intend to be bound, even though there are terms still to be agreed.

If the parties fail to reach agreement, the existing contract is not invalidated unless the failure to reach agreement renders the contract as a whole unworkable or void for uncertainty.

There is no contract if the parties are not in agreement on what they regard as an essential term. The more important the term, the less likely it is that the parties will have left it for future decision.