Existential angst

One of the most frequently recurring issues that the courts have to address when considering disputes between contracting parties is the question of whether there really is a contract between them and, if there is, what its terms are intended to be. The latest Technology and Construction Court case to tackle this issue, and one that provides a helpful review of the law relating to contract formation, is Co-Operative Group (CWS) Limited vs International Computers Limited.

CWS claimed damages for an alleged repudiatory breach of contract by which ICL agreed to develop a software application for use in some of CWS' food stores. ICL counterclaimed for non-completion and/or repudiation of an earlier contract between itself and another co-operative society which had merged with CWS. The judge began by considering whether the parties had ever actually reached agreement on the terms of the contract.

As is well known, the basic principle of contract formation is that one party makes an offer that is then accepted by the other. In the real world, of course, things are rarely that simple.

Sometimes it is possible to look at the totality of negotiations between the parties and decide that at some point a concluded contract was reached, as is evidenced by the parties' conduct thereafter. Although this approach may avoid having to pinpoint precisely when the contract was concluded, it doesn't mean that you don't have to prove that all of the important contractual terms have been agreed. That was where CWS got into difficulties.

CWS argued that the contract between the parties came into existence either by conduct or by implication as a result of a series of continuing negotiations. As the judge remarked: "These are not the means by which commercial contracts are usually made." It is certainly true that the court can look at the negotiations between the parties to help it in deciding whether the parties did reach an agreement on all the material terms and that they agreed to be bound by those terms from then on. It is also the case that if the parties did indeed intend to enter into a binding agreement by whatever means they chose, the court should not seek to undo that agreement.

The question to consider is whether the parties had actually concluded their negotiations on all the points that were important to them.

If they had not, it is likely that the contract was never formed. The best known case on this subject is British Steel vs Cleveland Bridge, where the court found that there was no concluded contract.

The TCC also reviewed the guidelines set out in the well-known case of Pagnan Spa vs Feed Products Limited. This case provides a very useful checklist when considering contract formation. The court drew attention to one of the principles clarified in Pagnan that was relevant to the present dispute: it is for the parties to decide whether they wish to be bound and, if so, by what terms. It does not matter whether these terms are, objectively, important or unimportant. That is up to the parties, not the court. The parties cannot ask the court to decide which issues out of a number that had been discussed were important (and therefore binding contractually) and which were not. In this particular case, it was clear that the parties had never agreed, among other things, on the issue of liquidated damages, which was considered by the parties to have been of "fundamental importance" during their negotiations. Consequently, no contract had been formed.

What are the lessons to be learned from this case? There is the obvious point which is undoubtedly easier to say than to observe in practice: always seek to ensure that it is clear that a contract has been agreed between yourself and the other party or parties and that the terms of that contract are unequivocal. Perhaps more to the point, during negotiations there will be a number of issues that both parties consider to be of fundamental importance. It is for the parties to decide what they are – the court will not impose them retrospectively – and for the parties then to reach agreement on them. Failure to do so may mean that no contract has been concluded.