No written contract? No problem

A US$60m project for a luxury Caribbean resort came to a sorry end for many hundreds of disgruntled customers. Even if your project does not involve cabanas, windswept beaches or multi-million pound deals, you can learn from the lessons of Harlequin and its contractor.

Setting the scene

The ‘startling features’ of the case include:

  • a Serious Fraud Office investigation into the development company
  • findings of fraud and dishonesty against one of the directors (in Dublin High Court)
  • defamation proceedings which resulted in an apology and compensation for a customer
  • a failure to ring-fence the 30% customer deposits paid in advance
  • no limit on deposits accepted (nearly 2000 deposits were paid for units at Buccament Bay, fewer than 10% of the contracted for units were built, and a mere 1% of investors now occupy their units)
  • business advisers who worked for both the developer and the contractor (an ‘unsatisfactory’ arrangement – where there was no written contract – which unravelled).

The principal players

The court described the two key players this drama. The first had an element of dishonesty which was ‘rooted in his stubborn desire to believe that everything would somehow turn out for the best‘; and ‘a Walter Mitty-type figure who, through an unhappy mixture of dishonesty, naivety and incompetence, has caused irreparable loss to thousands of people.’

The other was ‘a singularly evasive witness.

The court summarised that it was “in the unenviable position of having to tell the story, and make findings of fact, in circumstances where the evidence of the two critical witnesses was fundamentally flawed.” [21]

No written contract

The reason this story piqued my interest lies principally in this relevation:

Harlequin paid ICE, its contractor, around $52 million. They did so, not only without any sort of written contract, but without any detailed agreement as to the scope of the works to be carried out, the monitoring of those works, or their valuation… McGovern J described this situation as “extraordinary”. That is, if anything, an under-statement. In my view, for a project of this size, the fact that there were no financial controls whatsoever beggars all belief.

However, on a proper analysis a contract of sorts was found to exist between the parties for a short period of the project. It was evidenced by an email, a diary entry, a note and a further email; and supported by emails and documents after the final email.

The judge said “…in circumstances where work has been carried out, the courts will strive to construe the documents so as to find the requisite degree of certainty for a contract to exist. They will endeavour to be the preserver, and not the destroyer, of the bargains made by the parties. A contract can come into existence during performance, even if it cannot be precisely analysed in terms of offer and acceptance, and the fact that the work has been performed makes it unrealistic to argue that the contract was void for vagueness or uncertainty…” [326]

The baddies

The business advisers came under the court’s gaze as it was alleged they should have advised the developer to have a formal contract with the contractor. This was negligent. Not having a contract was described by the court as ‘ridiculously risky‘ based on:

  • the size of the project (‘ambitious’)
  • it represented the minimum security the investors required
  • the need to raise finance
  • the parties both expressed a positive desire for one.

Only the business advisers sailed off happily into the sunset – despite their negligent advice the court decided it did not cause most of the losses suffered by the developers (or the investors). Everyone else was left miserably broke.

What should you do?

Ensure you have a contract strategy which reminds you not to start work until you are clear about the scope and how much you’ll get paid (and when).

Once you’ve got some terms agreed, record your agreement clearly and keep records as the project progresses.

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