Contracts: Not so fast

How do you fancy a Porsche 911? More particularly, the Porsche 911 GT3 RS4? Cost you a bob or two. Kevin Hughes has an appetite for that fabulous animal. So when he got wind that Porsche was likely to produce the last batch of his dream car, he put his name down and a £10,000 deposit at the Porsche dealer in Bolton. They happily signed up the form of contract much like you do for the next building contract. And yes, the standard form of contract contained all sorts of bumf thought up by clever designers of so-called standard forms. And when Hughes fell out with his dealer, the judge strictly applied those contract clauses. Poor Hughes went away without the Porsche, tail between his legs. Wait. Three judges in the Court of Appeal reversed the somewhat convincing analysis of the first judge – convincing, that is, on a strict application of the rules. The Court of Appeal, I say, took a commercial approach; some great lessons for construction disputomania.

Let me tell you the story. Pendragon Sabre Limited T/a Porsche Centre, Bolton, promised Kevin Hughes that if, just if, one of those 911s was allocated to them, he was first on the waiting list. And lo, one came the firm’s way. But the Porsche dealer sold the car to someone else – in fact, Pendragon made out initially that they had not received one of the cars. Hughes was peeved; he phoned his solicitors. Pendragon argued there was no proper contract. It was more, as happens in construction, that they and Hughes were just edging their way towards a fully blown contract. Pendragon argued that they had merely set up an “agreement to agree”. Such a device is not a binding done deal. It has gaps. This one had gaps: no vehicle (yet), no price, no delivery, no specification, no certainty – in fact, nothing much at all. In any case, if there was some form of contract, the small print in the standard form document expressly said the seller was not obliged to fulfil orders in the sequence in which they are placed. More: the signed form (it was signed) said that it was the only set of rules that were binding if they applied at all. More: (rather like appears in building forms of contract) the small print said: “No verbal arrangements by the seller and no variation or modification of these terms and conditions shall in any way be effective etc, etc.” So that’s why the first judge tipped Hughes’ case off the pitch.

Hughes and the Porsche salesman had definitely agreed no one could jump the queue. That was a collateral contract, said the three judges

The case came to the Court of Appeal. In front of these three judges, Hughes won hands down and won compensation. The reason is that this court found two contracts had come into effect. These days the courts are more ready to find a contract. It is true that a key ingredient arising out of an offer and acceptance is certainty. Notwithstanding, the two parties knew that a particular Porsche model was required, knew it would be the retail price, knew that the specification was yet to be fixed, knew that no delivery date was in the wind, knew that the “deal” was based on a “hope” that Porsche would pop a 911 GT3 RS4 on the Bolton doorstep: lots of uncertainty. No matter, said the Court of Appeal. It’s all certain enough. The deal was not an “agreement to agree”; it was an all singing and dancing contract.

If that is so, there is a snag. The contract with standard form rules had strict terms, which totally torpedoed the notion that Hughes was head of the queue. That small print relieved the Porsche dealer from keeping to the agreement. And if, as had happened, the garage and Kevin Hughes had verbally agreed he was first come and first served, such talk was trumped by the clause that ousted such discussions. How did the Court of Appeal deal with that?

This is when this second contract comes trotting along. Hughes and the Porsche salesman had definitely agreed no one could jump the queue. That was a collateral contract, said the three judges. Put shortly, Hughes had stumped up the £10,000 deposit (albeit returnable) and had signed the substantive contract on the basis that he was first in line. True, that verbal contract collided head on with those strict standard form rules. Be that as it may, said the court, the collateral contract extinguished those rules in the standard form. They didn’t apply given the second contract. The judgment says: “The effect of a collateral contract may be to vary the terms of the main contract”, and that’s what has happened here. It meant that the collateral promise was broken. And therefore the dealership was in breach of two contracts. If Pendragon still had the 911, it must go to Hughes. It didn’t have it. So he was entitled to damages. The Porsche 911 was by now worth £170,000. He would have paid £135,000 So the damages came to £35,000.

The Court of Appeal binds all lower courts and arbitrators and adjudicators. Important. More important is a very ordinary event in a lot of building contract negotiations – folk frequently agree verbally a deal quite unlike what the contract documents say. Trumped.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple