The conditions for forming contracts

It is a long established foundation of contract law that the necessary conditions for the formation of a contract are agreement (usually in the form of offer and acceptance), consideration and contractual intent.

Where substantial commercial organisations embody or record the progress and outcome of their negotiations in documents, issues as to the legal consequences of those negotiations are primarily to be resolved by construing the documents in their factual setting.

Leaving aside the law as to misrepresentation, mistake and rectification, the wishes and intentions of the individuals participating and their beliefs, then or later, as to the effect of the documents or oral exchanges are irrelevant, except to the limited extent to which matters of shared knowledge or understanding at the time may be part of the factual setting.

It has become fashionable to suggest that this classical language of offer and acceptance is unduly restrictive, and that instead the process should be examined more in the same way a jigsaw puzzle is assembled. These issues were recently examined in the case of Hescorp Italia -v- Morrison Construction in which His Honour Judge Hicks QC was critical of this latter approach.

Judge Hicks rejected any contention that a partial agreement may be reached in the same way that an abandoned jigsaw puzzle is available at any time to be completed by the insertion of the missing piece. In his view this does not fit with the law as it stands. In the language of offer and acceptance a rejected offer lapses.

Issues as to the existence or otherwise of a contract generally turn on their own particular facts. On the facts of this case Judge Hicks found that there was no contract. This being the case it followed that Hescorp was entitled to be paid for its work on a quantum meruit. While there may be argument to reduce the value of that quantum meruit, there being no contract, Morrison could not pursue its contractual counterclaims.

These conclusions, which will be critical to the commercial outcome of the dispute between the parties, are a consequence of poor procurement practice that seems to be endemic in the construction industry.

Morrison, in joint venture with Impregilo UK Limited, issued an invitation to tender stating that it had been awarded the contract for a project described as the "Arena and Leisure World" at Spon Street in Coventry. The invitation was for a work package for the design and erection of structural steelwork, and it gave certain extracts from the main contract conditions.

These included that the main contract was under the JCT 1981 Form of Contract; that liquidated and ascertained damages were fixed at £30,000 per week, and that the duration of the subcontract would be eight weeks. It was stated that if the subcontractor's tender was accepted it would be a requirement that the subcontractor enter into a formal subcontract agreement.



Following some exchanges Hescorp submitted a quotation in qualified terms. In particular the qualifications required that a later date for completion of the subcontract works be fixed, and that a reduced amount for liquidated and ascertained damages should apply.

Moreover, Hescorp wrote to the joint venture suggesting the subcontract to be extremely unbalanced and as an alternative proposed the use of the FCEC Blue Form of Subcontract.

Further exchanges and meetings took place between the parties. Neither side would back down over their assertions in regard to the subcontract completion date and liquidated damages. By now the parties were playing table tennis with the subcontract conditions. The joint venture sent a copy of the subcontract to Hescorp made out in its preferred terms. Hescorp returned the document, amended to reflect its version of the disputed provisions.

Meanwhile, the subcontract works had commenced on site and had progressed towards completion. Accordingly the discussions concerning completion date and delay damages were no longer concerned solely with abstract questions of risk. Delay in the subcontract works had in fact occurred and disagreement on the subcontract terms was now about the establishment and quantification of a claim by the joint venture against Hescorp for delay, most of which had already occurred.

Judge Hicks was satisfied that both parties well understood this and that for the purposes of the requirement of agreement, both regarded the completion date as an essential term requiring to be settled if there were to be a contract.

The consequence for all of this was a finding in favour of Hescorp that no contract existed. However, in accordance with the provisions of the Civil Procedure Rules, since a quantum meruit was inherently unliquidated, Hescorp would not be entitled to summary judgment for any specified sum of money. The application was therefore adjourned for further argument and evidence concerned with the amount Hescorp would be entitled to be paid for the work it had carried out.



BOXTEXT: INBRIEF



The Case: Hescorp Italia SpA -v- Morrison Construction Limited, TCC, 17 March 2000.

The Issue: Formation of contract.

The Implication: No contract will be formed in the absence of agreement on essential terms, either because the parties have agreed a term to be essential, or because the contract cannot be enforced without that term.



BOXTEXT: Visit Geoff Brewer on the internet at http://www.brewer-con.co.uk, which now gives a fully searchable library of all articles published in Contract Journal since January 1996.