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Construction disputes: can I rely on an unsigned contract?

The fact that the underlying contract was never signed will not always be fatal. Whether a contract has been formed will require close consideration of the facts.

This guide was last updated in January 2017

A party's prospects of winning an argument that it is entitled to rely on the terms of an unsigned contract will be improved if it can demonstrate:

  • that it has relied on there being a binding contract in existence, and/or it has carried out significant works based on that reliance;
  • that both parties have conducted themselves as though there is a binding contract in existence;
  • that any alterations put forward to the unsigned contract were 'de minimis' in nature, and sought to set out in express terms what would have been implied in any event;
  • that there was no particular reason that the formal execution of the documents was essential.

Whether there has been acceptance of terms and whether the parties intended to create legal relations are questions of fact which may be proved with reference to the parties' correspondence; the status of the negotiations and whether there were further, essential terms awaiting consideration and agreement; and whether the contract was merely awaiting execution formalities.

Has a binding contract been formed?

For a contract to be binding, the parties should have reached agreement. Generally speaking, this means that the following requirements must be met:

  • an offer capable of acceptance has been made by one of the parties;
  • that offer has been accepted by the other to whom the offer is addressed.

In this context, acceptance should be a final, and unqualified, expression of assent to the terms of the offer.

Generally speaking, acceptance cannot be inferred from silence alone save in the most exceptional circumstances, and this must usually be backed by conduct.

Sometimes an agreement which meets these requirements may still lack contractual force because of one or more of the following:

  • it is incomplete;
  • the terms are not sufficiently certain;
  • its operation is subject to a condition which fails to occur;
  • it was made without any intention to create legal relations; and/or
  • it lacks contractual force for want of consideration.

In the case of continuing negotiations, the court will look at the whole correspondence between the parties. The question of whether or not an offer has been accepted is a question of fact. The question of whether parties intend to be bound will also be determined objectively, and is ultimately a question of fact.

If the words 'subject to contract' are used in the context of the parties' negotiations, or in the draft deeds that are exchanged, this usually means that the contract will not be effective until executed and exchanged. However, the Supreme Court confirmed in 2010 that a stipulation that any agreement between the parties is subject to formal execution can be waived.

In circumstances where negotiations do not produce a contract, a court may be willing to 'perfect' the agreement by implying non-essential terms based on the standard of reasonableness. It will only do so if the agreement is workable and is not void for uncertainty. A court may also be willing to find that there is a provisional agreement in place until such time as it is superseded by a formal agreement.

For policy reasons, a party will not be able to attempt to withdraw unmeritoriously from concluding an agreement or to deny the existence of an enforceable contract - particularly if the other party has engaged in significant acts of reliance on the existence of an enforceable contract and/or expended significant sums or carries out significant works. For that reason, a heavy burden of proof will be placed on the party who asserts that no legal effect was intended by the negotiations.

A court is more likely to find that an unexecuted contract is binding if its formal execution is regarded not to be essential for the parties to proceed to close the transaction.

In some situations, it is possible for an offer to be accepted by conduct because such conduct would be perceived to be more consistent with a finding that the parties intended to be bound. In these circumstances, a finding that an express stipulation that any agreement is 'subject to contract' has been waived may also be possible.

If, during the negotiations, one of the parties states that the contract is "approved" but then makes a number of alterations to it to which the other party does not expressly assent, it is possible that a court might find that a binding contract came into existence on the terms of the draft agreement if the parties continue to perform the contract for a length of time.

Generally speaking, a communication attempting to vary the terms of the offer will not be considered as an acceptance. However, the courts have held that an introduced or varied term will not destroy the effectiveness of the acceptance if it merely makes express what would otherwise be implied. The test here is whether the party that proposed the variation reasonably regarded its purported acceptance as introducing a new term into the bargain, and not as a clear acceptance of the offer.

Is the other party liable for payment?

Estoppel

A party (Party B) may be 'estopped' from denying that it has obligations under the contract where the other party (Party A) acts on reliance of the belief that there is in existence a binding contract in a way that confers a benefit on Party B, with Party B's knowledge.

The doctrine of estoppel cannot usually be used as a 'sword'; for example, by Party A to compel Party B to be bound by the terms of the contract. However, Party A may use estoppel as a 'shield' in response to an argument raised by Party B that no binding agreement exists.

Quantum meruit

In the construction context, a claim for 'quantum meruit' arises out of a situation where either there is some uncertainty about the amount due, or there is no contract between the parties for certain works that have been carried out.

If there is ultimately no contract in place, a quantum meruit claim could arise out of the following:

  • a claim to be paid a reasonable sum for additional or varied works;
  • a claim to be paid on a reasonable basis for works carried out in anticipation of the conclusion or formal execution of a binding contract.

Generally speaking, the assessment of a quantum meruit claim is usually based on the actual cost incurred by the contractor in performance of the works, provided this was reasonably incurred. The following factors could also be relevant:

  • quotations obtained;
  • where negotiations got to;
  • market rates.