Use of early elements of agreement where there is no contract

Is it possible that the embryonic elements of agreement, which the court has found do not amount to a contract, can still in some way govern the relationship between the parties, for example by limiting the amount which a party can recover in the event of default?

Lawyers. We exist on the cutting edge. As I sit resplendent in a wing collar shirt and bell bottomed trousers, I'm confident I have my finger on the pulse. Who's number one in the charts? Erm... Is it Phil Collins? What's big on television? Let me see. Dallas? OK, maybe not. But lawyers do avidly follow trends in decided cases, to try and uncover patterns which show which way the courts will tend to lean on certain issues. This helps our clients to undertake the serious business of risk management.

One area which has seen significant movement over the last few years is the protection of the expectations of negotiating parties. Suppose an employer and a contractor are negotiating the terms of a building contract. Suppose that, although the building work proceeds, and although some aspects of the relationship between the parties seem to be agreed, the negotiations stall (to read an article discussing the perils of negotiation fatigue click here). One or other of the parties may think that they have agreed enough important points for a contract to be in place. What if the court disagrees, and says there is no contract at all? Is it possible that the embryonic elements of agreement, which the court has found do not amount to a contract, can still in some way govern the relationship between the parties, for example by limiting the amount which a party can recover in the event of default?

The Dinkha Latchin v Auchi case from 2003 was a very colourful one. The protagonists were expatriate Iraqis, Dinkha Latchin an architect, and Nadhmi Auchi a successful businessman. They fell out spectacularly over payment for some speculative design work which had been carried out for a villa in Tangiers which never got built. During the trial it emerged that the culture in this expatriate community was to do business based on trust and honour, rather than written agreements. There were bizarre accusations – the architect had only taken the job because he had a girlfriend in Tangiers, so was quite happy to work there free of charge; the architect worked under an assumed name in Tangiers; the client was the subject of an international arrest warrant and desperately wanted the villa built because he was temporarily unable to use his home in the South of France. Somewhere in the middle of all of this, the judge was able to imply a contract into the relationship between the architect and his client. This was held to be the case even thought here was no written agreement. The court also decided what the terms of this contract were, and that under these terms the architect was entitled to reasonable payment for his work. The court of appeal upheld the judgment. It found that the parties had entered into a contract even though their initial understanding had been there would be no payment to the architect for the work done.

But what if the court had not been able to find a contract between the parties? It is open to a court to decide that there is no contract even if, for example, there have been extensive contract discussions and one party carries out and completes services for the other party in the meantime. The Dinkha Latchin case is one which shows that courts will be more willing to find the existence of a contract where one party has performed substantial services for another in a commercial context, but without the special ingredient of intention to create binding relations this will be for nothing. If the court cannot find that there was an intention to create a binding legal relationship, then there cannot in law be a contract. At the same time as saying that there is no contract, the court may paradoxically also decide that the party which has carried out the services deserves payment for the work carried out. Put another way, the court may decide that the party which has had the benefit of the services does not deserve to have that benefit for free. How should a court go about deciding what the level of payment should be if there is no contract?

This area of law is known as "restitution". Traditionally, the courts have had the ability to order payment to the party which has provided services or carried out work on a "quantum meruit" basis, meaning literally "as much as he has earned". Also traditionally, it has been thought that there is nothing in the abortive or inconclusive contract negotiations which can be used to limit or guide the level of payment. Is it then a straight question of the value (to the party which has the benefit of the work) of the work done? Or is it the cost of the work to the party which carried it out?

Or should it in fact be the level of costs envisaged by the parties in their abortive contract discussions? Can a party's entitlement be limited to a level agreed during negotiations, even though eventually there is overall no agreed contract?

This is where an interesting trend has emerged, a (reasonably) radical departure from the traditional approach to this area of not quite contracts. The traditional approach is "all or nothing". The proper basis for assessing a quantum meruit does not include assessing elements of agreement as part of an incomplete whole. If there is no contract overall then individual elements of agreement do not bind the parties either. This approach is typified by the Court of Appeal decision in Rover International v Cannon Film Sales from 1989. The case concerned a film distributor, who had a contract (or so he thought) to distribute films in Italy, including the original "Highlander" and various other movies unlikely to tax the intellect. The distributor released the movies prematurely and without authorisation, and had his contract terminated. Then it transpired that the misbehaving distributor had not been incorporated as a company when they entered into the "contract" so in fact there was no contract at all! The film producer sought to recover damages non-contractually on a quantum meruit basis. The hapless distributor argued that this recovery should be limited to the amount the producer could have recovered under the contract, if the contract had been valid. The court rejected this. It was not willing to apply the provisions of a non-existent contract to limit the film producer's recovery.

And so things might have remained, until the case of Birse v St David in 2000, where the court took a flexible, purposive approach towards areas of alleged contract which were concluded even though other areas were in dispute. Birse had carried out extensive works for St David, but the court was clear that, on the facts, there had been no intention to create binding legal relations and there was therefore no contract. However, although the position may have been less clear than if a contract had been found to exist, the flexible principles of the law of restitution were capable of achieving substantial justice in the case. The court said that "Full account can be taken of the extent of "agreements" or "accords" in fact reached regarding work that had been/was being/was to be carried out even if the final contractual agreement was never made, and proper weight can be given to the extent of identified "disagreements" and/or other factors which prevented the contract from being concluded."This was a significant clarification of the ability of the court, when considering restitutionary remedies, to rely on documentation which forms part of an unagreed whole in forming its conclusions. This line of reasoning was followed in the more recent case of Stephen Donald Architects v Christopher King, where there was no contract but there was evidence that some elements of agreement had been reached between the parties. Although the judge there rejected a claim for payment on a quantum meruit, he considered that if a claim had been justifiable in all the circumstances, the sum awarded would have been calculated by reference to the suggested contract sum, which formed part of the abortive contract negotiations. It would be wrong for a party to get the benefit of substantial services without paying for them, but it would be equally wrong for the service provider to recover a greater sum for its services when in truth the parties had already agreed a lower sum.

It will be rare, even in cases such as Birse and Stephen Donald, where no contract is found, that the parties have entirely failed to agree any matters. In those circumstances it would be perverse not to take into account those matters which are agreed, and those matters which are definitely not agreed, when assessing available remedies.

Some have argued that these cases mark the likely end to parties raising "no contract" arguments. If a contractor's fee estimate acts as a cap on recovery, there is no point arguing "no contract" and trying to make a greater recovery on a non-contractual basis when it turns out (for example) that the job is not making a profit.

In truth it will by no means always be appropriate for a court to discern a contract, even where one party has fully provided services at the request of another party. The courts are wise to be mindful of the need to avoid making an agreement for the parties, simply because it may be advantageous to the parties (because for example the payment and performance obligations will generally be less ambiguous, and the contract will provide terms of reference for future liability, including liability for latent defects). In effect, the trend to develop restitutionary quantum meruit is really just a way for the courts to try and "do justice" between the parties without the need for the courts to stray from the well established principles which are used to identify contractual agreement. If commercial parties can be clear what principles the court will use in assessing contract formation cases, they will be better able to predict, if such a situation arises, how the courts would assess their own circumstances. This in itself, in terms of certainty and risk management, is advantageous to the commercial community at large. It's the lawyers' favourite trend of all – the status quo, without the denim jackets.

For further information please contact John Wevill on +44 (0)20 7367 3480 or at john.wevill@cmck.com