Execution of building contracts and letters of intent

The Technology and Construction Court has recently considered whether a contract becomes binding and concluded if the Employer has not signed it (Anchor 2020 Limited v Midas Construction Limited [2019] EWHC 435).

In this case, as happens quite often on construction projects, the design and construction of a new retirement community commenced under a Letter of Intent (“LOI”) and subsequently 4 further LOIs were entered into and the financial limit increased whilst the parties attempted to agree to terms of the contract. The LOIs provided that the work to be carried out by the Contractor would be governed by certain documents, which included the JCT Design and Build Contract 2011 as amended by a schedule of amendments.

After a number of months of negotiations, the parties reached an overarching agreement and the Contractor returned a signed version of the contract to the Employer. There were then subsequent disagreements about whether the Contractor’s risk register should be included as a contract document. Despite this, the works continued and practical completion was achieved.

Then came the final account dispute over how the work should be valued. The Contractor, who was claiming over £10 million extra, sought to be paid a reasonable sum for the works and argued the building contract was not binding because the Employer had not signed the building contract. The Employer said the works should be valued according to the contractual terms and the Contractor was therefore bound to the fixed price of £18.2 million. It is worth noting that the fifth and final LOI expired on 30 June 2014 before the signed building contract was sent by the Contractor to the Employer and prior to practical completion.

In reaching its decision, the court considered the judgement of Lord Clarke in RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Company KG (UK Production) [2010] UKSC 14:

“Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”

The court held that despite the absence of the Employer’s signatures, which was known to be the case by both the Employer and the Contractor, the partially signed contract was binding upon the parties. The parties had a clear intention to create legal relations, the essential terms had been agreed and the Contractor had performed its services and completed the works in accordance with the terms of the contract. The Contractor should therefore be remunerated according to the contract.

The decision in this case is unsurprising. It illustrates the importance of the parties’ intention to create legal relations. It is worth remembering two things. It is prudent a) not to rely on a series of LOIs and b) for both parties to execute the building contract.