Monday 4 February 2008

No Contract, No Job

Introduction

For many companies a building project can be one of the most serious financial transactions entered into. The formation of a legally binding and enforceable contract between the parties should be a prerequisite to the commencement of any project.

It has always been said that people have an aversion to contractual fine print, but much can hang on whether there is a contract or not. Unfortunately, in many cases the formation of a contract is approached in a cavalier and careless fashion, especially where there is a pressing need to commence work.

Badly drafted and ill thought out letters of intent are all too frequently used as a substitute to drafting a formal contract.

Adjudication

Those involved in a dispute may wish to have it resolved by adjudication. There is no doubt that adjudication is the most widely used method for resolving disputes in the construction industry. One of the basic ingredients needed in order to take a dispute to adjudication is a clear agreement to use it or to ensure that the law applies to the agreement. The law only applies if there is a written contract.

If a party picks a consultant to advise and assist them in resolving their dispute, they expect the consultant to concentrate on establishing what the dispute is about and preparing their case for referral to adjudication. This may for example involve investigating why they are not being paid for variations, or why the project has been delayed, and calculating their entitlement to damages. Whether they have a contract or not seems much less interesting. But the parties in the recent case of Bennett (Electrical) Services Limited v Inviron Limited (2007) spent considerable time and money in adjudication and court, arguing about just that.

Bennett v Inviron: Round One

Bennett entered into a dispute with Inviron. Bennett referred the dispute to adjudication, but the adjudicator concluded he did not have jurisdiction because there was no contract between the parties. Bennett’s attempt to resolve the dispute by adjudication failed.

Bennett v Inviron: Round Two

Bennett felt sure there was a contract and raised a second adjudication. Inviron challenged the adjudicator’s jurisdiction on two points. One of these was that there was no contract between the parties.

The second adjudicator came to the conclusion that there was a contract and that he had the necessary jurisdiction to deal with the dispute. The reasoning behind the differences of opinion between the adjudicators is unknown, but that didn’t concern Bennett, particularly when the second adjudicator made an award to Bennett of £297,477.

Bennett v Inviron: Round Three

Inviron refused to pay the award, so Bennett took the award to court to enforce payment by way of summary judgement. Inviron opposed the application for two reasons, one of which was that there was no contract between the parties

Bennett argued that the entire contract was contained in a letter headed “SUBJECT TO CONTRACT” the relevant parts of the letter are:

“We hereby confirm that… it is our intention to enter into a secondary sub-contract with yourselves… The secondary sub-contract sum will be £169, 157… Sub-contract works to commence on site dated 13th April 2004. On the basis of this letter of intent we instruct you to proceed with all works… to meet the programme… If and when the secondary sub-contract is concluded, (which will not occur until we notify you of approval of your appointment) the terms and conditions of such contract shall govern retrospectively. In the event that a secondary sub-contract is not concluded we shall reimburse only your reasonable and substantiated direct costs...”

Bennett argued that simply because the letter was headed “Subject to Contract” did not prevent it from having contractual effect, only that Bennett anticipated the letter being superseded by a more formal contract at a later date. It contained all the terms of the construction contract. It instructed Bennett to proceed with all the works necessary to progress the contract and to meet the programme requirements referred to. It also identified the fixed-price for the duration of the contract.

Inviron argued that the letter expressed an intention not to be bound contractually until a formal contract was entered into.

His Honour Judge David Wilcox, on 19th January 2007, held that no contract had come into being. Summary judgement was not granted to Bennett.

The crucial factor in this judgement was that the letter was headed “Subject to Contract”, which the judge took to mean that the parties did not intend the letter to have contractual effect.

Conclusion

It is unknown how much the parties spent on this dispute. The first and second adjudications will probably have cost a significant amount. In addition to this there is the time in court with solicitors and leading counsel on each side, not to mention the parties wasted time. It is quite likely that that the whole exercise will have cost nearly as much as the sum that the second adjudicator awarded in favour of Bennett. It may be that some of the issues in dispute were clarified and resolved by the exercise, but the parties still did not have a resolution of their dispute.

Although the second adjudicator considered the dispute and made his award, the judgement by the court meant that the time, effort and money expended to achieve that award were all wasted.

Always start your project with a written contract.