Formation and conclusions of contracts

The Ricoh Arena in Coventry, home of Coventry City football club, was completed in August 2005. As well as the 32,000 seater stadium, the arena includes a leisure centre and gym, various hospitality areas, a hotel and a casino.

The main contractor for the design and construction of the project was Laing O'Rourke. Haden Young carried out the design and installation of the mechanical and electrical works. No subcontract documents were ever signed by Laing and Haden, and a dispute arose as to the existence of a subcontract between them.

Haden argued that there was no contract because all essential terms were not agreed despite that it had proceeded with the work to completion and had received interim payments by reference to the terms of a draft subcontract. Laing insisted the contract had been made despite the absence of an executed contract. It contended that all the essential terms were agreed.

In the Technology and Construction Court, Mr Justice Ramsey identified four main issues. The first concerned agreement upon a limit of liability to be included in collateral warranties to be provided by Haden. Laing accepted that no agreement had been reached upon the limit of liability in the warranties, but argued that such an agreement was not essential to the existence of the subcontract. Second, the parties disputed the limit of liability for consequential losses that could be claimed by Laing under the subcontract. Haden contended that there had been no agreement on this essential term. Third, the parties disagreed on whether it was necessary for the subcontract to have been formally executed for the agreement to come into existence. Finally, there was dispute over the scope of the subcontract works and whether this was properly described in the subcontract documents.

Justice Ramsey summarised the guidance given in the leading text book Keating on Construction Contracts: "It is sometimes difficult to determine whether a concluded contract has come into existence when there have been lengthy negotiations between the parties but no formal contract has ever been signed. It is suggested that a useful approach is to ask whether the following can be answered in the affirmative:

a) In the relevant period of negotiation, did the parties intend to contract?

b) At the time when they are alleged to have contracted, had they agreed with sufficient certainty upon the terms that they then regarded as being required in order that a contract should come into existence?

c) Did those terms include all the terms which, even though the parties did not realise it, were in fact essential to be agreed if the contract was to be legally enforceable and commercially workable?

d) Was there sufficient indication of acceptance by the offeree of the offer as then made complying with any stipulation in the offer itself as to the manner of acceptance?

Limit of liability

Bearing this guidance in mind, the judge held that the parties had approached the agreement on both the liability for consequential loss and the limit of liability under the warranties as inextricably linked. The parties had failed to agree a limit of liability for consequential loss under the subcontract and the evidence showed that the parties had regarded this as essential to the formation of the contract.

Haden was also correct in its submission that agreement upon the limit of liability under the warranties was essential to the formation of a contract between the parties. The evidence demonstrated the parties had accepted that there could be no binding subcontract until these terms were agreed.

It was also clear that the parties had proceeded on the footing that there would be no contract unless and until there was a formal signed and executed contract. The fact the Haden had conducted itself consistent with its expectation that a subcontract would eventually be agreed did not detract from these conclusions.

The judge commented that there were many cases where contractors or subcontractors start on site without having a concluded contract. While those in a managerial capacity are negotiating the terms of the contract, these involved carrying out the work necessarily conduct the day to day operations by reference to the draft contract documentation. That conduct could not be taken as a representation that a contract existed.

On the final point concerning the scope of works, the judge was satisfied that this was a typical matter of detail and not something that was essential to the formation of the contract.

In conclusion, in the absence of a subcontract, Haden was entitled to reasonable remuneration under a quantum merit for any works it had carried out. How that reasonable remuneration might be calculated will remain to be resolved at a later date. Nevertheless, for both parties, this judgment will provide a timely reminder of the importance of securing all necessary terms of a contract at the earliest possible opportunity.

Summing up

The case: Haden Young Limited -v- Laing O'Rourke Limited TCC 8 May 2008.

The issue: Formation of contract.

The implication: Even though works are proceeding, a contract may not be concluded where the parties have failed to agree on essential terms or where they fail to meet any prescribed method of concluding the contract.