Everyday life involves striking bargains, clinching deals and agreeing to do things, particularly if you have children. Apply the word 'contract' to any of these situations, however, and most people recoil with horror. 'It's not in writing' and 'I have not signed anything' are common responses. (With your children, of course, the right answer is that domestic arrangements are not intended to be legally binding. ) Despite the fact that they participate daily in binding contractual arrangements, going to work, taking the train, buying a newspaper, many people are surprised to learn that you do not need to have a signed document to have a contract. Just what it is that you do need was considered in two rather different recent cases.
Clarke & Sons v ACT Construction (Judgment 16.7.02) concerned the conversion of a cold store by the defendant contractor to a coach depot for the claimant coach operator. The parties had collaborated successfully on previous projects with the result that, although this one was likely to cost upwards of £1 million, no attempt was made to agree or record the basis upon which the contractor was to do the work. Work started in 1992 and its pace was defined by the coach operator's available funds. From time to time the contractor rendered interim applications for payment.
In 1994 the parties agreed that work should stop and the contractor claimed payment for work done the previous year and a further £25,000 on account while 'a few loose ends were tied up'. The final account was not submitted until 1997, when the contractor claimed sums in excess of £200,000. The ensuing dispute was referred to the Technology and Construction Court.
Rather than embark on a 16-day trial, the judge decided to determine some crucial issues, the first being whether there was a contract between the parties. If necessary, the judge would go on to decide its terms as to payment, the scope of the works and the contract period.
The judge found that, as the essential ingredients for a complex building contract are agreement, both as to the scope of the work and the price, and that neither were defined with any precision, there was no contract. He concluded that the contractor was on site on an informal basis without any contractual framework and that the work would be paid for, as and when it was carried out, on the basis of a reasonable remuneration. This finding apparently came as something of a surprise to the parties, who both agreed that there was some sort of contract but disputed its terms.The coach operator appealed.
The Court of Appeal disagreed with the judge's findings. It said that even if there is no formal contract, there may still be an agreement to carry out the work - the entire scope of which was not yet agreed - even if a price had not been agreed. It concluded that provided there is an instruction to do work, and an acceptance of that instruction, then there is a contract and the law will imply into it an obligation to pay a reasonable sum for that work.
Jim Russell Racing Drivers School v Rockingham Motor Speedway (judgment 18.7.02) concerned negotiations between the defendant, which proposed to construct a motor racing circuit, and the claimant, which wanted to run a school for racing drivers at the circuit. The parties negotiated over five years during various meetings and discussions. By July 2000, they had agreed to, and signed, a document entitled 'Heads of Terms'. Later that year, the defendant pulled out of the deal.
The judge was asked to decide whether the negotiations had matured into a contractually binding agreement. The 'Heads of Terms' included a provision that the document was not intended to be legally binding. The claimant argued, however, that the provision had been overridden by events.
After examining a good deal of evidence, the judge concluded that there was an inherent inconsistency between a purported agreement and a document which was said to be 'subject to contract'. This important proviso could only be expunged by clear words. As the cases here show, you do not need a written agreement to have a contract. However, if you have one it should not include the words 'subject to contract'.