Most contracts in the rail industry are formalised in writing, with a number being the result of many months of negotiations and being recorded over hundreds of pages…
Two recent decisions in the English courts have highlighted that judges are willing to find that a binding contract exists even when its terms have not been finalised (or formalised) in writing, but where it has been apparent to the court that there was an intention to create legal relations between the parties. A passenger rail franchise will often run to 500 pages and a contract for the purchase of new trains can run to over 300 pages. Others are, thankfully, considerably shorter and easier to read. However, if services are required to be delivered at short notice it is not unknown for parties to start to deliver those services on the basis that the contract is being negotiated, the parties know more or less how they will deliver the services and the contract will be signed soon.
The courts try to find a contract
Within the English legal system, the courts will try and find a basis for the actions of the parties, and then impose the relevant contract terms which provide that outcome, whether or not it was what each of the two parties wanted.
Wells v Devani centred around whether commission should be payable to an estate agent where an oral contract (but no written contract) existed – and whether failure to comply with the Estate Agents Act 1979 meant that the estate agent should be deprived of his commission. The Supreme Court decided that based on the actions and conduct of the parties, a legally binding contract did exist. In addition the court considered that the failure to comply with statute should not deprive the estate agent of his whole commission.
In Anchor 2020 Ltd v Midas Construction Ltd, the failure of the employer to sign a building contract (it had only been signed by Midas) was not fatal to the existence of the contract. The Technology and Construction Court decided that a binding contract existed in the form of the partially signed contract. The key here for the court was that it believed that the parties intended to create legal relations and had agreed all of the essential terms of the contract.
Beware of the parties’ conduct
Put simply, there is a risk that a binding contract may have been created without the parties realising or without the “formalisation” of its terms.
There are certain things to look out for. Parties to a contract (whether physically in existence or not) should be aware that context and conduct are important in determining whether a binding contract exists.
• where parties intend to be bound and have acted on their agreement then the courts are reluctant to find that any such agreement is too uncertain to be enforced
• if on the facts it would be naturally understood that something would happen, the implication is that it will happen (and that this forms part of the binding contract)
• the courts are willing to imply terms into a contract to render it sufficiently certain or complete to constitute a binding contract (where without implication of such terms it would otherwise be incomplete and unenforceable)
• an unsigned written agreement which is intended to be signed by both parties can form the contract between the parties, despite the lack of execution
• actual conduct, where accepted by both parties, can be seen as an agreed variation to the contract terms which are being finalised
• even the words ‘subject to contract’ do not necessarily prevent a contract from being found to exist, where the parties’ actions are otherwise consistent with the operation of its terms.
So what should you do?
The benefit of being certain about the terms you have contracted on cannot be understated. Contracting best practice has to be (and has always been) to ensure that your contract conditions are agreed and signed in a timely fashion, and before any significant work is carried out or services undertaken.
There are times when commercial or programme pressure mean that ‘kicking the can down the road’ on the contract negotiation/finalisation is very appealing. This should be resisted wherever possible.
In (exceptional) circumstances where the agreement of contractual terms have fallen behind the progress of the works or services, the parties need to ensure that (i) their actions and conduct are consistent with the commercial deal they have struck and (ii) they do not commit to do something (or not do something) which they wouldn’t want to form part of a binding contract.
And of course, in these circumstances don’t forget to complete the contract.