In case some readers think the answer to the above question is a matter of dry academic law with no practical relevance, some £10 million turned, at least in part, on the distinction between those phrases in the case of Anchor 2020 Ltd v Midas Construction Ltd.
Midas started work for Anchor under a series of letters of intent (five in total), in relation to a retirement community project in Hampshire.
The parties intended, as set out in the letters of intent (“LOI”), to contract under a JCT Design and Build 2011 form of contract. In carrying out its works, Midas operated as if the JCT contract was in place, as required by the LOI.
Midas signed a copy of that JCT contract, but Anchor did not. Midas carried on working on the project.
Payment dispute exacerbated by unsigned contract
A dispute arose between the parties as to payment. Midas said there was no contract in place, because Anchor had never signed the contract. As a result, said Midas, it was entitled to be paid on a “quantum meruit” basis for the works it had carried out. That is, to be paid a reasonable sum for those works. By contrast, Anchor said that a contract was in place, even though they had not signed the JCT contract.
The effect of this was that Midas claimed a quantum meruit payment of £28.5m, as against the original price for the works the parties had agreed of £18.2m. Alternatively said Midas, if there was a contract, then it included their risk register and, on that basis, there was a contract sum of circa £33m.
The judge had to decide whether the parties had entered into a contract. As can be seen from the above figures, a lot turned on that issue financially.
No intention to create legal relations
The judge found that the parties had entered into a contract on the basis that they had reached agreement on all essential terms, based on the JCT contract but excluding the risk register. Those matters which had not been agreed were not essential to the formation of the contract.
Midas had contended that the parties had not intended to create legal relations. It said both parties had proceeded on the basis that there would be no contract at all until both parties signed the contract. As the judge noted, this was close to a “subject to contract” argument, but not quite the same. He said it was “subject to signed contract”.
The judge stated that it is possible for parties to contract on the basis of a written agreement which is stated to be signed by both parties and even where that agreement states it will be ineffective without being signed.
Make your position clear on whether a contract is required, and on what terms, and act accordingly
An important factor in the judge’s finding that a contract had been entered into was that Midas had insisted during the project that a contract should be in place. He said, “In a case like this, with works of considerable substance requiring detailed documents, I consider that the fact of performance is of considerable weight”. To put those works in context, by the time of the court hearing Anchor had paid Midas just under £21m.
Had the parties been acting on a “subject to contract” basis, then the outcome may have been very different, because generally that clause acts to prevent a contract being formed until expressly entered into.
The significance of this case is that if a party does not wish to enter into a contract other than in the form of an acceptable written agreement, it should make that position clear by use of the phrase “subject to contract” and maintain that position during the project. Further, it should act consistently with that position. Simply carrying on with significant works in the absence of that agreed written contract, as Midas did, can cause significant problems later on if you want to contend that no contract was formed.
If you have issues with construction contracts, please contact our construction lawyers for advice.