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04 May 2006

Get that contract signed!

by Frazer Moss, Kyle Trattler

Where a concluded, complete and formal document is not executed it may mean that the contractual terms are unclear or unexpected or that there is no agreement at all.

It is often the case that parties involved in significant construction projects who have been in negotiation reach agreement upon most, or even all, of the contractual terms but for one reason or another, fail to sign a formal contract document despite then contemplating doing so.

The failure to sign a formal contract document in those circumstances can lead to unexpected contractual results, as the two recent cases of Monarch Building Systems Pty Ltd v Quinn Villages Pty Ltd [2005] QSC 321 and Decor Ceilings Pty Ltd v Cox Constructions Pty Ltd; Cox Constructions Pty Ltd v Decor Ceilings Pty Ltd (No 2) [2005] SASC 483 illustrate.

General law position

It is generally accepted that where parties have been in negotiation and reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the transaction may fall into any of four classes (Masters v Cameron (1954) 91 CLR 353 and Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310):

  1. a situation in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect;
  2. a situation in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document;
  3. a situation in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract; and
  4. a situation in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract containing additional terms.

Which class a transaction falls into will depend on an objective interpretation of the words and conduct of the parties during the negotiation process.

Simply no agreement

In the case of Monarch Building Systems Pty Ltd v Quinn Villages Pty Ltd [2005] QSC 321 the parties undertook contractual negotiations before undertaking the project but failed to execute a contractual document. The project proceeded notwithstanding the non-existence of a signed contract between the parties. The question for the court was whether there was a contract between the parties and, if so, its terms.

On 21 March 2000, the project manager advised Monarch that it was the "successful trade contractor" and referred to "formation of the trade contract". Later, the Principal sent Monarch a copy of the standard TC/CM1 form of contract for execution.

The original form of the contract provided for liquidated damages payable by Monarch for each day of delay. The section requiring an insertion of the amount payable was not completed and Monarch deleted the provision in the contract. Quinn rejected this change and insisted on the clause being included. Monarch made it clear that it did not agree to the inclusion of the clause.

The project proceeded without this issue having been finalised but with the other contractual obligations under the contract being followed by both parties.

When materials were delivered after the date required under the contract, a dispute arose relating to the late supply and in turn the issue came before the court.

Quinn argued that there was a concluded contract between the parties which included all the terms of the standard contract except the terms relating to the provision for liquidated damages, which was left for further negotiation. Monarch argued that there was no contract because the matter was within the third category identified above and that the intention was to not make a concluded bargain unless and until a formal document was executed.

Chief Justice de Jersey examined the correspondence between the parties and held that:

  • the parties' clear mutual intention had been to execute a contract in the form of TC/CM1 but that had not occurred;
  • a dispute over the provision of liquidated damages was the primary reason a contract document was not executed; and
  • subsequent correspondence between the parties demonstrated that the parties' views on liquidated damages remained divergent.

He concluded that there was no contract between the parties because they had not agreed on the significant issue (to them) of liquidated damages.

The matter did not reach the threshold for the third class outlined above because there was no agreement on all relevant terms. Interestingly, Chief Justice de Jersey noted that it may have been that, if all matters were agreed, the lack of execution would not necessarily have meant there was no binding agreement.

It followed that, in the absence of a contract, Monarch's remuneration was to be assessed on a quantum meruit basis.

Letter of Intent

In the case of Decor Ceilings Pty Ltd v Cox Constructions Pty Ltd; Cox Constructions Pty Ltd v Decor Ceilings Pty Ltd (No 2) [2005] SASC 483, there was a dispute about which documents constituted the contract.

The issue arose from a letter of intent issued by Cox (the head contractor in the project) after a tender process for the subcontract had been completed. On 31 March 1999 Cox wrote to Decor granting the contract in the following terms:

"Your Subcontract will be AS2545-1993 with amendments as set out in the project specification.

We are in the process of preparing the formal instrument of agreement which will be available at our offices for your endorsement in due course.

In the meantime we instruct your company to commence works as previously agreed in accordance with this correspondence."

Importantly, the project specification did not contain any amendments to AS 2545-1993 and the letter did not enclose a copy of AS2545-1993.

On 8 July 1999, an amended AS2545-1993 was sent by Cox to Decor. Decor signed some but not all of the pages of the contract and made further amendments to the contract and returned it to Cox. Cox specifically rejected those amendments and no final contract was ever signed.

The court held that the letter of 31 March 1999 represented an agreement between the parties while the reference to AS2545 -1993 indicated that they intended to enter into a more formal agreement at a later date.

Therefore this case fell within the fourth class of case. The parties were bound immediately and exclusively by the terms of the letter of 31 March 1999 while expecting to make a further contract in substitution of the first contract.

The parties were working towards a final, complete and formal agreement, but did not reach that end. As the terms of the second contract (amended AS2545-1993) were never agreed, the parties remained bound by the terms of the letter of intent which included, by reference, an unamended AS2545-1993 contract and an uncompleted Part A and Part B schedule to that contract.

That had serious ramifications for Cox as it meant that:

  • the substantial amendments made by Cox were not incorporated into the contract (including changes the extension of time regime and delay costs);
  • the incomplete Part A was part of the contract and did not include details such as amount of liquidated damages, date of completion and name of the superintendent under the contract.

Conclusion

These two examples demonstrate that where a concluded, complete and formal document is not executed it may mean that the contractual terms are unclear or unexpected or that there is no agreement at all.

In these circumstances, liquidated damages regimes or other contractual rights which may be expected at the start of the project may not be applicable and the rights of the parties may ultimately be determined under general law remedies such as quantum meruit.

Each of the above outcomes may change the risk allocation profile between the parties in unforeseen ways and jeopardise forecasted returns for a project.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.