The English Technology and Construction Court recently handed down a decision in Anchor 2020 Limited v Midas Construction Limited [2019] EWHC 435 (TCC), holding that a binding contract existed between a Contractor and Employer, notwithstanding the fact the Employer did not sign the contract. Perhaps unusually, it was the company which had not signed who argued for the existence of the contract, and the company which had signed which denied that a contract had been made.

The facts

This was a final account dispute, where Mr. Justice Waksman was asked to consider whether the Parties had entered into a contract. Anchor 2020 Limited (the "Employer") engaged Midas Construction Limited (the "Contractor") to perform the design and construction of a retirement community in Hampshire, UK. Following the Parties' initial agreement, the Contractor returned a signed version of the contract to the Employer. The Employer never counter-signed the contract, although the works were commenced by the Contractor and practical completion was achieved.

The Contractor denied there was a binding contract and argued it should be paid a reasonable sum, rather than a contractual price, for work done. The Employer argued the partially signed contract was binding and the Contractor's works should be valued in accordance with the terms of that agreement.

The facts of the dispute are complex. Several letters of intent ("LOI") were issued by the Employer pending finalisation of the formal contract. The contract sum was agreed between the Parties and documented in one of the LOIs. However, the final LOI terminated a year prior to practical completion.

The legal test

The Judge considered the principle that the formation of a contract depends on factors including: the objective intention of the parties, what was communicated by words or conduct, and whether that leads (objectively) to a conclusion that the parties intended to create legal relations and had agreed on all the terms which they regarded, or which the law requires, as essential for the formation of a legally binding relationship.

The Judge acknowledged that the relevant contractual documents included spaces for execution by each party, and the Employer required the Contractor to sign the contract. The Court also considered the fact that the Contractor had, from time to time, requested the Employer to sign the contract, and that it was documented in the Employer's minutes of meeting that it did intend to sign the contract; all of which suggested that the Parties felt that something still needed to be done. Notwithstanding this, the Judge found that the partially signed contract was a binding agreement between the Parties, for the following reasons:

1. there was an intention to create legal relations; the Judge said he gave considerable weight to the fact the Contractor continued to perform the works, in accordance with the terms set out in the contract, up until practical completion. If the Contractor did not think there was a binding contract in place, it is unlikely it would have continued performing the works; and

2. the essential terms had been agreed by the Parties by the time the partially signed contract was sent to the Employer.

A reasonable sum

It follows that the Judge found that the Contractor's entitlement to payment was to be valued in accordance with the terms of the contract. However, the Judge also took the opportunity to comment on the Contractor's claim for reasonable payment, what the law calls a 'quantum meruit' claim.

The Contractor argued that the claim should be valued by reference to the value of the work, and that yardstick should be applied, not by some assessment of the value to the Employer, but rather the cost to the Contractor in performing the works, with a profit margin on top (as if there had been a "cost plus" contract). The Judge rejected this argument and said that if the Contractor had been entitled to a reasonable sum, the proper basis for assessment would still have been the payment terms set out in the unsigned contract. This was because, under the LOIs, the works had been carried out in accordance with the proposed terms of the unsigned contract. The Judge also recognised that the Contractor's motivation for arguing that no contract existed was that it had discovered it was making losses on the contract, and may have regretted the agreed price. Whilst not explicit in his criticism, the Judge emphasised that it should not be for the Employer to pay for that commercial decision, which would be the result if the Contractor was to be paid on a costs-plus basis.

What the decision means in practice

It is not the case that there will always be a contract if work begins before a formal contract is executed (for example, in cases where a contract is being negotiated subject to contract). Whether there is a contract will entirely depend on the circumstances of the case. However, this case highlights that even where the parties are proceeding on the basis that there are formalities to complete and the contract has to be signed, a contract may be in place. This may be important for agreements in the Middle East where compliance with the formalities of contracting can take a long time to happen. If you are waiting for an English law contract to be signed by one of the parties, it may be that there is a contract in place already. Further, even if there is no contract, the terms of the intended agreement may be relevant to working out how much is due if work proceeds, particularly if some work has been done under a contractual LOI.