Letters of intent
WHITTLE MOVERS v HOLLYWOOD EXPRESS (CA) [2009]
Traditionally Courts bend over backwards to find a contract exists where the parties had begun performance whilst negotiations continued. However, in recent years the Court of Appeal (CA) has indicated a firm departure from that approach and this is once again reflected in this case. The implications for contracting parties are potentially quite serious and, in many respects, uncertain.
facts:
After a tender process, H selected W as its sub-contractor for certain distribution services. The words ‘subject to contract’ were used frequently in the documentation and the letter of intent made clear that any work undertaken before the formal contract had been concluded was at W's risk.
The parties then entered into an ‘interim agreement’ which was largely on
the same terms entered into between H and its previous sub-contractor. No
long term contract was ever signed. However, W started performance, invoiced
H and H paid W. Later on details of the long term agreement were agreed in
principle but H never supplied a signature copy. H then gave six months' notice
of its intention to terminate its arrangements with W in line with the notice
period referred to in the interim agreement.
decision:
- The High Court Judge held there was effectively a contract based on the
interim agreement which was terminable upon reasonable notice of no more
than six months but subject to the prices which had been agreed for the
long term contract.
- On appeal, the CA held there was no contract at all. W could claim for services rendered on a ‘restitutionary basis’ reflecting the ‘unjust enrichment’ that H had received by having benefited from prices for a short term appointment appropriate only to a long term agreement.
points to note:
- The decision that there was no contract at all is extremely surprising.
As was acknowledged, there would be little difference from a financial perspective
between a finding of a contract under which a party was obliged to ‘reasonable
remuneration’ and, on the other hand, a finding of ‘no contract’ leading
to a restitutionary claim for ‘unjust enrichment’.
- This case highlights once again the legal risks associated with entering into a letter of intent, or other interim agreement, but then acting as if the long term contract is in place and proceeding with work, especially where wording exists (either in correspondence or in draft contracts/tender documents) which reflects that intention.
- The case partly suggests that ‘subject to contract’ or equivalent wording
may still be effective even where all of the contract terms have been agreed.
However, if there is no contract there may be no limitation of liability
and, conversely, no basis for formulating a claim for breach of contract.
This might leave a party having to rely upon a claim in negligence. Also, query what would be the position of
relevant employees and their TUPE rights?