A contract requires an agreement on all essential terms, an intention to create a binding contract, a value exchange (what lawyers call ‘consideration’) and certainty.
Determining the point at which the parties have agreed all the essential terms, is rather more difficult in practice than the internet would lead you to believe! That’s partly because we are poor at the process of getting into contract.
Where a contract document is never signed, then the parties may end up arguing that:
- the deal was not binding because some further terms were never agreed or further acts were never completed, or
- the deal was done and they were under contract now, even though there were further terms to be agreed or some further formality to be fulfilled.
Not binding? This could apply where one party made it clear that a specific term was essential for a deal to be finalised and if that term was not agreed, there was no deal. Alternatively, one party might have made it clear that they were required to sign a contract eg for their internal governance. Both of these undermine the intention needed because both parties need to intend for a contract to be made NOW.
Deal done? The parties can conclude a binding contract, even though it is understood between them that a formal document recording, or even adding to, the terms agreed will need to be executed subsequently. This a sort of contract before the contract.
Legal v commercial
What about the position in Fenchurch v AA (2023) where the client knew that the legal terms were not yet agreed, but the provider was convinced that agreement of the commercials was sufficient?
The court needed to consider the conduct of the parties to determine their intention – was there evidence that both client and provider wanted to be bound once the commercial terms were agreed, despite other key legal issues including an indemnity being unresolved?
This is a factual analysis and it is impossible to provide any hard and fast rules. But where works starts then:
- it is increasingly unrealistic to argue that there was no intention to create a contract, or that terms were essential that remain unresolved, or that the terms were not certain
- even if there is no contract, the provider might be entitled to be paid on the principles of unjust enrichment. This was the decision in the Fenchurch case.
However, where there is any form of contract, you cannot claim unjust enrichment – as the contract provides your right to money. If you start work without any/an incomplete contract and want to get paid, you may need to decide which of these routes to payment apply: express term, implied term or unjust enrichment. For more details, see Barton v Morris.
What should you do?
Firstly, ensure your contract processes are visible and repeatable to minimise the risk that work starts without a contract being in place.
Secondly, during negotiations make it clear whether terms are essential and NEED to be agreed, and whether formalities are strict requirements and NEED to be complied with.
Thirdly, never assume that the lack of a contract means you won’t be liable to pay or for poor performance.