Background
Construction projects are usually very time sensitive, and works often need to start before the parties are able to finalise all the contractual documents. In such circumstances, it is common practice to “bridge the gap” by entering into a letter of intent (LoI). An LoI allows the contractor to proceed with a limited scope of works (such as mobilisation or procurement of materials or long lead-in items) while the building contract is being negotiated and finalised, in an attempt to ensure that the project completion date is not delayed by the negotiation of legal terms. However, problems can arise if the contract negotiations take longer than expected or the contract is, in fact, never entered into. This is what led to the dispute between Anchor and Midas that was heard by the English Technology and Construction Court (TCC) earlier this year.1
The facts of this case are quite messy, but it is easy to see how they came about.
Following a tender process, Anchor selected Midas as the contractor to design and build a new retirement community at Yateley, Hampshire. The parties agreed to enter into an amended JCT Design and Build Contract (the ‘Building Contract’) but this was not concluded before the works were due to start. They therefore entered into a number of successive LoIs and the last LoI entered into expired on 30 June 2014.
Midas signed the Building Contract on 21 July 2014 and apparently considered it to have been entered into on that date. Before it was signed by Anchor, the contract documents were found not to be as Anchor was expecting or believed to be agreed: in particular, Midas had included a risk register which reopened negotiation points that Anchor had considered previously closed, in particular, responsibility for site conditions.
Before the dispute over the correct formulation of the Building Contract was resolved, the project had fallen into delay and Midas was exposed under the Building Contract to significant delay liability. At that point, the positions of the parties changed and it suited Midas to contend that the Building Contract had not been entered into (and it suited Anchor to contend the reverse). In addition, if Midas’ argument that the Building Contract had not been entered into were successful, Midas would be entitled to a payment of a significantly higher sum for the works.
The key question to be resolved was: had the Building Contract been entered into, or was Midas excused from delay liability and entitled simply to payment of its reasonably incurred costs?
TCC decision
The English courts have consistently ruled that the question of whether a contract is in place is an objective one, assessed on the facts, and does not depend on the subjective expectations or reservations made by the parties.2
This was confirmed by the TCC in Anchor v. Midas, where the court held that the question of whether a contract is in place will depend on the circumstances of each case, and will be decided objectively on the basis of the parties’ conduct. In this instance, the parties had agreed to be bound by the Building Contract from 21 July 2014 when Midas signed it because:
- The parties had agreed the contract sum, the schedule of amendments to the Building Contract and the wording of the novation agreements long before 21 July 2014;
- The progress meetings and Midas’ own monthly reports for July 2014 recorded that the contract was signed and was in place; and
- Midas performed the works as if the Building Contract was in place – it made payment applications, sought change orders and made applications for extensions of time under the Building Contract provisions.
The fact that there were discrepancies and disagreements about some of the annexures to the Building Contract (namely the risk register) did not mean that no contract was in place. Nor did the fact that the Building Contract included signature blocks for both Midas and Anchor, and therefore was intended to be signed by both parties. All that mattered was that the essential elements of the Building Contract were agreed by 21 July 2014 and the parties intended to be bound by them.
Further, the TCC held that the risk register was not part of the Building Contract the parties had already negotiated and agreed how risk was going to be distributed as part of the main terms of the Building Contract, and it would therefore have been odd to allow the risk register to distribute risk or to define scope of works differently.
Implications
The outcome of the case between Anchor and Midas is not entirely unexpected. The TCC has reached similar decisions in the past when it held that a building contract was binding even though the parties did not execute it because they could not reach agreement on the form of collateral warranties appended to the contract.3 In the current case, it would clearly have been prejudicial to Anchor had Midas’s conduct (in including within the engrossment contract certain documents which were not agreed) served to relieve Midas from a liquidated damages liability that clearly had been agreed between the parties.
However, the case of Anchor v. Midas serves as a helpful reminder of good practice to developers and contractors negotiating and entering into LoIs and subsequent building contracts:
- Always enter into carefully drafted LoIs that include a limit on the contractor’s expenditure and the right to stop the works at any time.
- However, do not limit the validity of the LoI by a date – otherwise, there is a risk that the LoI will expire and the parties will not have a valid contract in place (or that the contract that does govern the post-expiry period is different from the agreed LoI).
- Monitor the works that are being carried out under the LoI (and their value) and promptly enter into further LoIs as and when necessary.
- Always check hard copy documents before they are executed by both parties and completed, to ensure that they match the version agreed by the parties.
- Be aware that an unexecuted building contract may still be legally binding, especially when the parties perform their obligations as if the contract was in place. If you do not wish to be bound by a contract that is nearly agreed but not yet executed by both parties, then make that clear to the other party as soon as possible.
- Be wary of entering into an LoI prematurely. Doing so may help to protect the programme, but may expose a developer in particular to the risk that the eventual building contract will not be agreed, or at least that the contractor will not be as incentivised to negotiate once it knows that it has been appointed.
- Anchor 2020 Limited v. Midas Construction Limited [2019] EWHC 435 (TCC).
- G. Percy Trentham Limited v. Archital Luxfer Limited [1993] 1 Lloyd’s Rep 25; RTS Flexible Systems Limited v. Molkerei Alois Müller Gmbh & Company KG (UK Production) [2010] UKSC 14; Anchor 2020 Limited v. Midas Construction Limited [2019] EWHC 435 (TCC).
- Spartafield Limited v. Penten Group Limited [2016] EWHC 2295 (TCC).
Client Alert 2019-181
