In Spartafield Ltd v Penten Group Ltd [2016] EWHC 2295 it was found that the relationship between the contractor and developer was governed by a contract that had replaced a letter of intent, despite not having been properly executed.

Summary of the facts

The developer, Spartafield, sought a declaration that it had entered into a contract with the contractor, Penten Group, on the terms of the JCT Intermediate Contract with Contractor’s Design 2011 (“the JCT Contract”).

As part of the tender for the development, the JCT Contract was identified as the form of contract.

After Penten Group won the tender in 2013 the parties agreed a letter of intent authorising works up to the full contract sum. Work began on site and negotiations continued regarding the contract terms.

The parties had agreed the majority of terms of the JCT Contract by April 2014, save for collateral warranties; however, Penten did not sign the contract due to concerns it had around delays in the works. The works continued.

By March 2015 Penten’s costs had exceeded the letter of intent and they notified Spartafield of such. The relationship between the parties broke down and Penten Group sought to rely on the letter of intent in winding down its work.

Spartafield sought a declaration from the Court that Penten’s termination of the works was unlawful as the parties had actually entered into the JCT Contract on the basis that:

(a) The parties had agreed all the essential terms of the Contract; and

(b) The conduct of the parties was consistent with the performance of the JCT Contract.

Penten’s position was that:

(a) The parties continued to operate on the basis of the letter of intent; and

(b) The JCT Contract had not been signed.

Decision

Spartafield was successful - the JCT Contract applied and Penten was not entitled to cease the works as it had done.

(a) It was possible to contract on the basis of a JCT contract without it having been properly executed;

(b) The letter of intent clearly anticipated a formal contract being entered into in due course but did not impose a condition that such a contract had to be formally executed;

(c) The key contract terms had been agreed; and

(d) Whilst Penten was entitled to not sign the contract until the drafting properly reflected what the parties had agreed, this did not mean a legally binding contract had not been entered into.

Conclusion

Do not assume that just because a contract has not been physically signed that it is not legally binding on the parties. Parties to a construction contract should, where possible, seek to agree contract terms and properly execute a formal contract before works commence. Where this is not possible, parties should be aware that they may be found to be bound by contract terms agreed between the parties and so should beware if they seek to terminate.