Commencing Performance of a Draft Contract prior to Concluding Contract Terms

Although the current thinking of the courts is to consider contractual disputes from a practical commercial angle, they are usually not inclined to re-write contracts just because the meaning of the provisions of the contract in dispute might conflict with commercial common sense or if this would result in them being more in accord with normal business practice.

In a recent case involving Somerfield, the supermarket chain wished to retain a facilities management service provided by a company called Skanska, before the contractual details could be agreed. Somerfield suggested to Skanska that pending agreement of the details, the services should be provided in accordance with the draft facilities management contract which Somerfield had prepared. It sent a letter of intent to Skanska to that effect.

As the contract specified over 300 services to be provided, the negotiation of the detailed contract was always likely to take a considerable period of time. In the event, the final contract was never agreed, although the temporary agreement (such as it was), established by the letter of intent, was extended twice. A dispute arose ensued.

Somerfield argued that the draft facilities management contract applied in full. Skanska argued that none of the terms applied as the letter of intent contained the common phrase ‘subject to contract’. It was accepted by both parties that the letter of intent did create at least a limited form of contract. In the Technology and Construction Court , the judge had ruled that contractual relations were created only to the extent necessary to define the services Skanska was to provide.

The Court of Appeal held that the letter of intent went further than this and that the ordinary meaning of the words ‘under the terms of the contract’ clearly intended that the facilities management agreement should operate as laid out in the draft contract until it was finalised. To rule otherwise would be to construe the contract in a way which did not reflect the agreement into which the parties had entered. However, because of the complexity of the agreement, the contract could not be regarded as being binding with regard to each particular term. The agreement was therefore remitted back to the judge in the Technology and Construction Court to determine which of the clauses were applicable.

Making an agreement in writing means that the court will start by considering the wording of the agreement based on the premise that it conveys the meaning to which the parties of the contract were agreeing. Even ‘holding’ agreements should not be made without taking care and obtaining appropriate professional advice. By commencing work before formal terms are unequivocally agreed invites disaster when the relationship sours. In this case, the judge in the lower court clearly thought that it had not been sensible to enter into the contract on the terms contained in it. The words in the contract (and in this case a slection of the terms and not all of them), not commercial wisdom, determines the outcome.