In this briefing we look at the lessons to be learnt from some of the English contract law cases of 2019. Whilst the cases we cover do not involve any seismic shift in the law, they do serve as a useful reminder to those entering into contracts of some legal pitfalls to be wary of. We also flag the discontinuance of LIBOR and the impact of Brexit on contracts.
1. Formation and certainty of terms
Do you have a contract? Every year a multitude of cases are brought to court which centre around the basic question of whether a contract was ever actually formed. Even if it is possible to identify an offer and acceptance, if its terms are unclear it may not be binding on the parties. The cases we have selected below highlight the importance of being clear as to when a contract has been formed and what its terms are, particularly when one party has started performing its obligations.
In 2017 Mr Farrar sought a declaration from the court that the profit share agreements were binding. The judge at first instance and the Court of Appeal rejected Mr Farrar's claim and any right to profits.
In relation to Hazel Grove the evidence showed a "confusing picture" as to between who and when any oral agreement was made. Further it was considered extremely unlikely that the Rylatts understood the meaning of putting a trust over Hazel Grove. In relation to The Barns' heads of terms, Mr Farrar argued that at the time there was nothing left to agree in respect of the profit share arrangement and the "Subject to Contract" tag should have been ignored because the parties had intended to create legal relations. This argument failed on the basis that the heads of terms contained a clause that envisaged a joint venture partnership, which never materialised. Importantly, the "Subject to Contract" wording also featured on the face of the document and was therefore considered to cover all terms as it had not been expressly dissapplied from any specific clauses.
Anchor engaged Midas to design and build a retirement community in Hampshire. The parties were not able to agree all the terms before the construction start date so Anchor issued several letters of intent pending finalisation of the formal contract. The contract sum was agreed between the parties and documented in one of the letters of intent. Midas returned a signed version of the formal contract to Anchor, but Anchor did not counter-sign it. Following completion of the construction Midas claimed that there was no binding contract between the parties and that it should be paid a reasonable sum on a quantum meruit basis. Anchor argued that the partially signed contract was binding and Midas should be paid in accordance with the terms of that agreement.
The judge held that the partially signed contract was a binding contract, notwithstanding the fact that it was not signed by Anchor. Firstly, the judge concluded that there was an intention to create legal relations; he gave considerable weight to the fact Midas continued to perform the works, in accordance with the terms set out in the contract, up until practical completion suggesting that it considered there was a binding contract in place. In addition, the judge held that the essential terms had been agreed by the parties by the time the partially signed contract was sent to Anchor.
Practice points – formation
- Remember the basic requirements for a binding contract: an agreement, which is intended to be legally binding, supported by consideration, and sufficiently certain and complete to be enforceable.
- If you have to use a form of interim arrangement before the final terms are agreed, build in as much protection as possible. Clearly state the scope of the works and the terms on which it will be carried out. Specify which parts of the document (if any) are intended to be legally binding. Consider what is to happen if the full contract is in fact never signed.
- Remember that a contract may become binding, even though there are still terms to be agreed, if the parties have agreed all the terms that they objectively regard as essential for the formation of legally binding relations between them. Equally, as the Midas case shows, the lack of a signature on a formal written contract does not necessarily prevent the existence of a binding contract.
- Although the "subject to contract" flag worked in the Farrar case, it is not a cast-iron guarantee that a binding contract has not come into force; the parties' subsequent conduct may indicate that they have in fact reached a binding agreement.
2. Interpretation and implied terms
The first two Court of Appeal rulings in this section illustrate the differing rules on using evidence of pre-contractual negotiations in cases of interpretation and rectification. The first decision on interpretation confirms the strict operation of the common law rule against relying on evidence of pre-contractual negotiations; while it is permissible for a court to take into account pre-contractual material for the limited purpose of understanding the genesis and commercial aim of the transaction as a whole, this does not extend to admitting material in order to shed light on the genesis and aim of a particular contractual provision. By contrast in the second case, which establishes the test for rectifying a contractual document on grounds of common mistake, the court considered evidence of prior negotiations to discover the subjective intention of the parties in order to rectify a contractual document. The final case is a Supreme Court decision on the implication of terms.
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