THE DANGERS OF NOT FINALISING A CONTRACT

A recent case has starkly illustrated the potentially disastrous consequences of not properly concluding contractual negotiations, according to a leading corporate lawyer.  “Due to time constraints, parties to a commercial venture often proceed on the basis of a short letter of intent, with a view to putting in place a more formal contract at a later date,” says Philip Round, a partner at George Green LLP based at its Wolverhampton office. “If the parties do not follow through with proper documentation, there is a real danger of the parties failing to evidence agreement of crucial terms.”

Mr Round continues, “the technical and construction court case of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd concerned the appointment by a sub-contractor of a design consultant to carry out certain design work on a construction project, in anticipation of a wider agreement which never materialised. When the construction turned out to be defective, the contractor claimed against the consultant for the rebuilding costs.  The consultant denied liability but, if found liable, contended that the terms governing the relationship limited its financial liability.” 

According to Mr Round, the court found that the design work was governed by a letter of intent issued by the contractor at the outset. “The court explained that in determining whether a contract has come into existence, a court will consider when communications between the parties led to the objective conclusion of an intention to create legal relations. Where works have been carried out, as was the case here, it would be unusual to conclude that there was no contract. The court therefore decided that the relationship was governed by a letter of intent on the basis of which the consultant had proceeded to undertake the work, particularly as the letter was not expressed to be subject to contract.  As the parties did not subsequently reach agreement on the more detailed contract, the only terms which applied to the design project were those set out in the letter. Unfortunately, as the letter did not incorporate any limitation of liability, the consultant’s liability for the design work was potentially unlimited.”

Mr Round concludes, “parties often assume that key terms of a legal relationship will be self-evident from communications between them, and underestimate the importance of concluding a formal contract. This case demonstrates the danger of adopting this approach; it is crucial to take the time to finalise a written agreement, preferably before work has commenced while the parties are still in a comparatively strong negotiating position.”