Construction: When an unsigned contract binds the parties
A word of warning to those carrying out works without a fully signed and executed contract in place!
The fact that one party has not formally executed a contract does not automatically mean no binding agreement has been reached. This is the vital lesson for businesses who are negotiating commercial terms, particularly where work has already started before a contract is formally signed, following an important ruling.
In this case, the parties had intended to enter into an amended JCT Design and Build Contract. The defendant (a construction company) signed a copy of the contract on 21 July 2014 but the employer (the claimant) did not sign because of a disagreement – and they were unable to agree the final terms before the start date.
The defendant began the works anyway pursuant to various letters of intents under which it was authorised to start work subject to precise terms to be agreed. The last such letter was to expire at the end of June 2014, prior to the claimant eventually signing the JCT terms and novation agreements the following month.
The disagreement related to an accompanying risk register which the defendant had appended to its signed contract. This referred to various risk areas where the relevant work was described as “excluded” which the defendant said were not within its scope of work.
Contract or no contract?
The issue for the Technology and Construction Court (TCC) was to determine whether or not a legally binding contract was in place. The employer said there was, but the construction company disputed this. Applying the usual principles of contractual formation, the TCC found there was a binding contract on the essential terms of the JCT agreement. Whether or not there is a binding contract between the parties, and if so, on what terms, depends on:
- what was communicated between them by way of words or conduct
- whether that leads objectively to a conclusion that they intended to create legal relations (it is not dependent on the parties’ subjective state of mind), and
- whether they had agreed upon all the terms which they (or the law) regarded as essential for the formation of legally binding relations. Here, many essential terms had been agreed.
The TCC made clear that even if certain significant terms had not been finalised, an objective appraisal of their words and conduct may demonstrate that they did not intend agreement of those terms to be a precondition to a concluded and legally binding agreement.
The fact that one party had not signed the contract was not conclusive that there was no legally binding contract in existence. In fact, the TCC found that the defendant must have accepted it was entering into a contract at the point of signing the contract. It would not have continued to perform its obligation under the JCT terms until practical completion if it did not think it was bound to do so.
This meant the payment provisions of the JCT agreement applied, entitling the claimant to a substantially higher amount than if damages were due on a quantum meruit basis.
As a side note, the TCC rejected the defendant’s argument that the inclusion of the risk register amounted to a counteroffer. The fact that the parties were arguing about its inclusion or otherwise as a contract document did not necessarily mean there was no binding contract.
What does this mean?
When negotiating your commercial contracts and, particularly, if one party has begun performance of their obligations, you should proceed with care if one party has not yet signed the contract. The lack of a formally signed contract does not necessarily mean a legally binding contract does not exist – and the parties could well be bound by their respective payment and other obligations.
How can we help?
We advise businesses including construction companies and employers on the contractual relationships and their terms and conditions. For strategic advice on your contracts or if you need expert help with your contract negotiations, contact the expert commercial solicitors at Herrington Carmichael as early as possible.
Please contact Mark Chapman on 01276 686222 and Cesare McArdle on 0118 977 4045
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
Enter your email address for legal updates on Property Law.