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Shourav Lahiri

A recent UK case has brought to light the risks associated with an unsigned contract. Shourav Lahiri, a partner in the international law firm Pinsent Masons LLP, explores

We see this all the time. The contractor wins a bid. The developer needs work started urgently and cannot wait for the terms of a formal contract to be concluded. The contractor is keen to start work so that it starts receiving payment.

A “letter of intent” is offered and the contractor starts work. Work progresses. The contractor receives payment and an effort to agree on a formal contract is forgotten.

Then something goes awry on the project. Both parties hunt for the contract. Everyone knows there is no formal signed contract, but surely there is some sort of contract that can be found to exist? Maybe not.

The UK Technology and Construction Court’s decision in Haden Young Ltd v Laing O’Rourke Midlands Limited (2008) is a timely reminder to the construction industry of the risks associated with a contract left unsigned.

Offer and acceptance

The law of England and Wales and that of India does not require a formal contract to be signed for a contract to come into force. Just because parties later say that a formal contract is to be entered into, it does not mean that a contract is not already in existence (Shamjibhai v Jagood Hemchand AIR (1950)).

The Government of India Act, 1935, excludes the possibility of oral contracts being entered into by the Government but even that Act does not require a formal contract to be signed so long as offer and acceptance is evidence in writing.

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But if parties have agreed that there will be no binding contract until a formal agreement has been signed, the absence of a signed contract will prevent a contract from coming into existence. In Haden Young, the works related to the construction of a large football stadium.

The design and installation of mechanical and electrical works had been commenced by the sub-contractor despite there being no signed contract, and indeed were almost complete by the time the dispute arose. The main contractor contended that a subcontract had come into existence by conduct or estoppel as the sub-contractor had proceeded with the works and accepted payment as if there was a contract. The sub-contractor contended there was no contract because an essential term of the contract – that of the limit of its liability – had not been agreed.

The court agreed with the sub-contractor and held that there was no contract. The judge found that parties had accepted that a contract needed to be signed. That the sub-contractor proceeded with the works in advance of such signing was simply “anticipatory” of a contract.

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