No contract? No problem

I return, with no apologies, to the case of Birse Construction Ltd vs St David Ltd, which appeared again before the Technology and Construction Court over the summer. Readers of Building will remember it took place the context of the Partnering Charter, which was designed to promote "trust, integrity, honesty and openness" and "clear and effective communication".

These goals spectacularly failed but His Honour Judge Lloyd used the charter, on the basis of affidavit evidence only, to assist him in finding that a concluded contract had been agreed. Birse applied to the Court of Appeal, which resolved that cross-examination at a full trial was needed. So the court had to look again at the basic question of whether a contract was agreed – the "perennial question" as the courts, perhaps with some exasperation, have characterised it.

The court's further judgment is interesting on two counts: again, it rehearses the principles applied by the courts in determining whether or not a contract has been concluded; it also looks briefly at what happens if there is no contract.

In looking at the so-called "perennial question", of whether a contract was agreed, Colin Reese quoted six tests that can help determine the objective intention of the parties. These include the following:

• Reese said that even when the parties have not used terms such as "subject to contract", they may have intended that the contract shall not become binding until some further term or terms have been agreed – even though those terms are not in any sense "essential" to the contract.
• Conversely, the parties may intend the contract to be in force even though there are further terms still to be agreed or some further formality to be fulfilled that, objectively, might seem "essential".
• In particular, the idea that the parties must agree on the essential terms before a contract can come into existence is ambiguous, said Reese. It is not for the court to determine what the parties consider more important or less important. The parties are "the masters of their contractual fate" and must decide what is important.

On the facts of the case, Reese found that the parties wished to keep matters "in negotiation". He noted that St David had sent Birse a formal contract document that was stated in correspondence to "form the basis of our agreement" but he found that St David had also told Birse to "hold on to the contract and not to take it any further for the moment". Even though agreement appeared to have been reached, St David wished to keep open the question of whether it had agreed to all the terms until an internal review was concluded.

Subsequent delays in construction of the project on site meant that when St David finally sent the documentation for execution, it also signalled its intention to deduct liquidated damages. Not surprisingly, Birse then elected not to sign the contracts.

There is nothing surprising in this aspect of Reese's judgment. That he reached a different conclusion having heard the evidence from Judge Lloyd, who simply looked at the papers, should be a caution to solicitors giving definitive opinions on the "perennial question" without talking to their clients.

The fact that Reese found himself having to choose between different versions of the same events from both sides suggests that solicitors should be wary about what they hear from their clients, even where the story seems consistent with the documents and is straightforward.

If works are carried out while negotiations are ongoing, the courts should determine disputes in a way that accords with the parties’ contemporaneous aspirations

Of more legal interest, though, are the comments that Reese made about the status of those matters that the parties did agree. If works are carried out while negotiations are still going on, Judge Reese believes, the courts should determine disputes in a way that "sensibly accords with the parties' reasonable contemporaneous aspirations". Full account should be taken of agreements that were reached and proper weight given to particular disagreements.

So, he suggested, even if no contract was concluded, the price that the contractor offered should indicate the upper limit of the remuneration to which it could reasonably claim to be entitled. If the contractor is late and the employer can demonstrate loss, the contractor's remuneration should be adjusted accordingly. He suggested that any agreed liquidated damages could be applied.

This is a radical departure from the position that most of us have previously understood to be the case – that if no contract is finally concluded, then no parts of it can be binding on the parties. Crudely, if full agreement is not reached, all bets are off.

If Judge Reese's interpretation is followed then the advantages in pursuing arguments that no contracts exist are radically diminished.

If the contractor's tender, for example, acts as a cap on its recovery of reasonable costs plus profit, then the advantage of arguing that there is no contract on a job that is not making a profit disappears. Similarly, if the employer has remedies for delay even if no final contract is concluded, then there is likewise little point in arguing that no contract was agreed.