| Date | 13 January 1999 |
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| Judgment | J Murphy & Sons Limited -v- ABB Daimler-Benz Transportation (Signal) Limited, TCC 2 December 1998 |
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| The Issue | Formation of contract. |
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| Implication |
Agreement on essential terms is necessary for the formation of a contract unless it is found that the parties intended to be bound despite the absence of agreement on such terms. |
printThe necessary conditions for the formation of a contract are agreement (usually in the form of offer and acceptance), consideration, and contractual intent. Where substantial commercial organisations embody or record the progress and outcome of their negotiations in documents, questions over the legal consequences of those negotiations are primarily to be resolved by reference to such documents. Leaving aside the law as to misrepresentation, mistake and rectification, the wishes, intentions and beliefs of the individuals participating in those negotiations are generally irrelevant. It is astonishing therefore that the construction industry is often so inefficient as to allow major construction works to commence without fully documenting and formalising contract arrangements. It is rare that there is any doubt raised over the existence of consideration or contractual intent. However, in the absence of formal contract documents it is commonplace for there to be a dispute over the nature of the agreement, and in particular whether all essential terms have been settled together with a clear communication of acceptance. These matters were closely examined in the recent case of J Murphy & Sons Limited-v-ABB Daimler-Benz Transportation (Signal) Limited. In early 1996 ABB was negotiating terms with Railtrack in order to secure the main contract for a substantial programme of signalling works between Woking and Surbiton. During this period ABB was also in discussion with Murphy with the intention of sub-letting the general civil engineering and other sub-contract works. In February 1996 Railtrack gave ABB approval to proceed with construction works in advance of final agreement upon the terms of the main contract. Approximately one month later ABB in turn used that approval letter as a model to give instructions to Murphy to commence the sub-contract works. Murphy commenced works within a few days and the intended works were largely completed without any formal sub-contract ever being signed by the parties. Disputes arose, in particular as to the basis upon which Murphy was entitled to be paid, and proceedings were commenced alleging the execution of the works in the absence of any contract and claiming payment upon a quantum meruit. His Honour Judge Hicks QC carefully reviewed the legal position. He noted that it was often said that the parties must agree on essential or material terms in order to make a contract. However there were a number of circumstances in which parties who had failed to agree material terms would nevertheless be contractually bound. These included: (1) Where the court found as a fact that the relevant terms were in truth agreed. (2) Where the parties intended to be bound by the contract despite the absence of agreement on the relevant terms, and where those terms were capable of being supplied by operation of law, by custom or usage, or by implication. (3) A finding by the court that the relevant terms were objectively inessential, and (4) A finding that, despite failure to agree before commencing performance of the contract, later agreement of the relevant terms bought into existence a contract which 'related back' to the earlier performance. Judge Hicks also noted that it was clear that parties were free by 'letters of intent' or 'heads of agreement' to enter into limited interim contractual relations. Such interim contracts may or may not be superceded by the more comprehensive agreements which documents of that kind normally contemplate, but meanwhile they would be complete and binding in themselves. It was Murphy's contention that neither in the letter giving approval for them to commence works, nor in subsequent exchanges or meetings, had the parties reached agreement on certain essential terms. Judge Hicks closely examined the most significant of these contentions. The first concerned the sub-contractor's responsibility for the finalisation of design based on information to be provided by ABB. ABB had failed to provide Murphy with the relevant design information, forcing the sub-contractor to carry out additional design work outside the scope of the invitation to tender. Murphy argued that the parties had failed to resolve the basis for additional payments for this design work. Judge Hicks disagreed. He said that all the conditions attached to the question of payment for design had indeed been fulfilled, and thus, as with (1) above, the relevant terms were in truth agreed. Next, there was ambiguity in the tender documentation as to whether the price agreed between the parties was to be a lump sum or was to be calculated by general re-measurement. On this material term Judge Hicks found upon the evidence that the parties had not reached agreement. A third problem concerned a general statement that the intended sub-contract would be on a 'back-to-back' basis with the main contract conditions 'so far as they applied'. Such a shorthand approach often causes difficulties of interpretation. Obligations which can be clearly understood in the context of the parties to a main contract, may be incapable of conveying any meaning when transposed to a sub-contract. Judge Hicks held that this provision left certain material points unresolved. In conclusion, Judge Hicks held that no contract had been formed between the parties at the material time. Furthermore, the fact that Murphy had frequently made reference to a 'contract' between the parties, and had been paid against its monthly applications for payment, and in addition had failed to query the absence of sub-contract documents, did not give rise to an estoppel against Murphy's contention that no sub-contract existed.
CJ-9902
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