Beware work starting with negotiations incomplete
Anchor 2020 v Midas Construction (High Court) [2019]
Projects very often commence with contractual negotiations ongoing. This case is yet another example of the dangers of this and the uncertainties this can cause.
Facts:
Anchor intended to employ Midas to construct a retirement complex under an amended JCT Design and Build Contract which effectively placed ‘all risks’ with the contractor and provided for a fixed price. However, the parties were not able to agree the final contract before the start date and the works began to be carried out under a series of letters of intent, the last of which expired on 30 June 2014 and was not extended or replaced.
On 21 July 2014, Midas signed the JCT terms. It also appended a risk register that purported to exclude certain elements from the scope of works or effectively make them subject to additional charges (although it seems it did not draw the inclusion of this risk register to Anchor at the time that it physically handed over the signed contract bundle). Anchor, when it discovered the addition, disagreed with the inclusion of the risk register and as a result refused to countersign the contract. The issue of the risk register was not initially resolved, but Midas nevertheless carried out the works. Only several months later did Anchor finally concede to the inclusion of the risk register and countersign the contract as originally executed by Midas although by this stage Midas were obviously having second thoughts with the cost of the work having overrun the budget. At virtually the same time as Anchor countersigned the contract document, Midas therefore wrote to Anchor purporting to withdraw its contractual ‘offer’ made when signing the documentation back in July.
A dispute arose between the parties and the court was tasked with determining the contractual basis of the relationship. Interestingly, in the legal proceedings Anchor argued that a binding contract on the JCT terms came into effect on the 21 July despite the fact that they had refused to sign them at that point. Midas on the other hand denied that any binding contract had been formed on the JCT terms even though they had signed them. Instead they sought payment on what is called a ‘quantum meruit’ basis (’the amount deserved’). The price which had originally been agreed for the works was £18.2 million. Midas claimed £28.5 million on the quantum meruit basis or, if a contract was in place and the works referred to in the risk register were now included, £33 million. It is probably relevant to note that the original value of the work referred to in the risk register was thought to be around £155,000 (so comparatively very small and certainly very much smaller than was now being claimed).
At points during the dispute Anchor variously argued that a contract had come into existence on the 14 July 2014; 21 July; 14 November or 13 January 2015 which perfectly illustrates the uncertainty and the mess the parties had got themselves into!
Decision:
The judge held that there was a binding contract on the essential terms of the JCT agreement and this contract did not include the risk register. The judge followed the RTS v Molkerei judgment from 2010 where it was said:
“Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”
This means that that even when a written agreement expressly requires a signature, the lack of a signature is not necessarily conclusive against it being binding.
The judge found that the evidence showed that the essential terms of the contract had already been agreed between the parties. The issue with the risk register did not show that there had not been a contract between the parties in respect of the terms (and specifically the payment terms) of the JCT. The judge rejected the argument that the inclusion of the risk register was a counter offer from Midas and held that, even if there was a difference in substance created by the risk register, it was consistent with Midas seeking a variation.
It followed that on an objective assessment of the parties’ communications and conduct, they had intended to be bound on 21 July 2014 at the point of Midas’ signature and the payment provisions of the JCT applied.
Having come to the conclusion that it did and that Midas was entitled to the contractually agreed payment of £18.2 million, the court did not have to provide an answer to the issue as to what Midas would have been entitled to on a quantum meruit basis. However, it nevertheless expressed a view. Midas would have been entitled to a ‘reasonable remuneration’. It held that should be calculated on the same charging basis as set out in the JCT documents (i.e. not based on the contractor’s costs of actually completing the work) but taking into account defects in the works and any delays in performance for which it was not responsible – presumably that exact same £18.2 million.
Points to Note:
- Especially where there has been substantial performance by the parties, the courts will bend over backwards to try to find some form of enforceable contract. What the terms of the agreement are will be a question of fact in each case.
- If negotiations are ongoing and you want relations to continue to be governed by a previously agreed letter of intent in the interim, make sure that the letter does not expire creating a contractual ‘vacuum’ which the courts will attempt to fill.
- Consider seriously the risks of starting work or allowing work to start without the full contract having been agreed.
- It is clear that if the evidence suggests that a party has changed its position on the question of whether a binding contract exists because of what transpires during the course of actually carrying out the work, this will not be viewed favourably by the courts.