A recent decision from the Court of Appeal of England and Wales, concerning a dispute in which one party supplied services to another in contemplation of signing a formal written contract, highlights the courts’ reluctance to find that parties entered into a binding agreement by conduct. The case in question is Whittle Movers Ltd v Hollywood Express Ltd [2009] EWCA Civ 1189.

Prior to January 2006, Hollywood undertook distribution and warehousing services for United Cinemas International (UCI) and Blockbuster Stores, which it subcontracted to Trailers Limited. In 2004, the Terra Firma Group purchased the UCI and Odeon cinema chains. As part of the restructuring, Hollywood invited tenders for its distribution services and Whittle was the successful tenderer. The invitation to tender was expressed to be "subject to contract" and contemplated the execution of a formal written agreement.

Negotiations took place and a letter of intent was issued on 29 November 2005. On 2 December 2005, Hollywood faxed an “interim agreement” to Whittle. On 23 January 2006, notwithstanding the lack of a formal written contract, Whittle started performing the services and invoiced subsequently at a price per pallet commensurate with a long term contract. About a year later, with no draft contract forthcoming and Hollywood up for sale, UCI sent an email to Whittle saying that “The interim agreement was based on the old Trailers' contract which could be terminated by either side based on 6 months' notice.” Accordingly, in May 2007, Hollywood gave six months' notice determining the "interim agreement".

At trial, Whittle contended primarily that by conduct the parties had entered into a long term contract. Hollywood argued that by conduct the parties had entered into an interim contract terminable on six months' notice. Neither side put as its primary case that there was no contract. HHJ Raynor QC found no long term contract and held that the parties had by conduct concluded an interim contract terminable on six months' notice. He found Whittle bound by the prices negotiated for the long term contract.

On appeal, Whittle's position was that no contract was concluded and it was entitled to a restitutionary remedy; it sought a declaration accordingly. It claimed that Hollywood had been unjustly enriched by only having paid prices fixed by reference to a long term contract during the short period for which Whittle supplied services.

Waller LJ found the judge's reasoning that no long term contract had been concluded "unassailable". There was neither complete agreement on important terms nor any indication that either party was resiling from the requirement that negotiations were subject to contract. The parties had neither expressly nor impliedly waived the requirement for a formal written agreement.

Referring to Goff J’s judgment in British Steel Corporation v Cleveland Bridge [1984] 1 All ER 504, Waller LJ said that while parties are negotiating a contract under which they will, if the contract is concluded, enter into reciprocal obligations binding each other as to future performance, it is highly unlikely that by conduct they will conclude in the interim an executory contract containing terms still subject to negotiation.

It is more likely that they will have entered into what Goff J referred to as an "if" contract, i.e., a contract under which if one party supplies, the other agrees to pay a reasonable remuneration. However, even an "if" contract would not have been entered into if important terms were still under negotiation. In such cases the proper answer was “no contract” but a restitutionary remedy to the extent that one party has been unjustly enriched. The court should not strain to find a contract because a restitutionary remedy can solve most problems. As regards the implication of an interim contract, Waller LJ stressed that no contract will be implied unless necessary.

In Waller LJ's view, it was unnecessary to construct an executory contract, particularly one fixing the price at a rate that Whittle would have been unlikely to accept. There was also a difficulty and no necessity in finding an "if" contract because terms as to performance were still under negotiation. All negotiations were subject to contract and no binding arrangement was to come into existence until a formal document was signed. It did not follow that if services were provided before the contract was signed Whittle was not entitled to some remuneration. The receipt of remuneration did not of itself dictate that there was a contract.

Waller LJ considered it arguable that Hollywood had been unjustly enriched. Both parties were taking the risk that a long term contract would not be signed. Having accepted services before the contract concluded, Hollywood was bound to pay a reasonable sum for them. If the sum received was reasonable then Hollywood would not have been unjustly enriched, but if Whittle received less than a reasonable price then Hollywood would have been unjustly enriched. Although Whittle's primary case asserted a long term contract, it made clear that, if there was no contract, a restitutionary remedy was claimed. Therefore Whittle could assert "no contract" on appeal and seek a restitutionary remedy.

The case highlights the risks and uncertainty associated with entering into a letter of intent and subsequently acting as if an agreement is in place without signing formal documentation to that effect.