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Agree terms before starting work

09 November 2010

Commercial pressures often mean work starts on a project before the terms of the contract have been formally agreed. The terms of trading are then uncertain and in the event of a dispute, the court will have to decide whether there is a legally-binding contract and what, if any, terms apply.

No contract has arisen

Even if the parties have begun carrying out the work that was envisaged under the contract, in some circumstances the court may still find that no contract has arisen. Where the contract has been fully or substantially performed however, they are strongly inclined to find that a contract exists. The court made it clear In G Percy Trentham Ltd v Archital Luxfer [1993] that the fact that the transaction was performed on both sides will often make it difficult to find there are no contractual obligations.

For the courts to find that there is a legally binding contract there must be an intention to create legal relations, consideration by the parties, and agreement on terms which are judged to be essential to the contract. It is important to recognise that the court may still find that the parties have reached agreement on all essential terms, even if certain terms of economic or other significance had not been finalised. This was emphasised in the recent case of RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company. Although the parties had never signed the formal written agreement, the court found that the agreement had still come into effect. This was all the more surprising as the parties had been negotiating on a ‘subject to contract’ basis.

Terms and conditions

Many would argue that in the real world, you have to crack on with the work or risk losing it: terms, conditions and small print are a minor consideration when a big contract is hanging in the balance. But when things go wrong, as they often do, you need to be able to rely on your terms and conditions.

For example, you may ordinarily have provisions in your terms and conditions limiting liability or limiting the damages to a fixed sum. If no formal agreements have been signed yet a contract is still found to have existed but without those provisions, your liability is then unlimited. If a substantial claim is made against your business could this bring it to its knees?

If you have no choice but to start work before negotiations are finalised, at the very least, try to identify the key areas of risk and try to agree on terms on a basis that will address those.

Generally, the courts are increasingly willing to find that contracts exist, so even when formal documents have not been signed the lesson is to agree first and start work later.

For more information about disputes for contractual agreements, please contact our dispute resolution team.

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Paul Gordon LLB
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