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    Need to Agree Clear Contractual Terms: Harvey Shop Fitters Ltd -v- ADI Ltd

    Date:
    1 May 2003

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    The Dispute

    The recent case of Harvey Shopfitters Ltd -v- ADI Ltd [2003] All ER (D) 129 (Mar) serves as a reminder of the need to have clear contractual terms. If you leave things unsaid, the Court may say them for you.

    The case concerned refurbishment works carried out by Harvey on a number of flats owned by ADI. As often happens, a letter of intent was issued by the architect to allow early commencement of the works:

    "…I write to confirm that it is the intention of our client, A.D.I. Limited, to enter into a contract with you on the basis of the tender sum of £339,895.34 exclusive of VAT, for the above project.

    The main contract documents are currently being prepared for signature. I confirm that the conditions of contract will be those of the JCT Intermediate Form of Building Contract 1994 Edition amended as stated in the tender documents and this contract is to be executed under hand...
    If you are agreeable to the foregoing please… sign the enclosed copy of this letter and return it to me at the above address."

    Harvey duly signed and returned the letter and proceeded to perform the refurbishment works. No 'formal' contract was signed. Following completion of the works, a dispute arose over Harvey's time and money claims and ADI counter-claimed for delay damages. One of the issues arising out of the dispute was on the wording of the letter of intent.

    Whilst both parties agreed that the letter of intent constituted a binding contract, they could not agree on its terms. Harvey contended that the letter was a 'simple' contract whilst ADI contended that the parties' contract was on the IFC Conditions. ADI had two lines of attack:

    - the terms of the contract between the parties incorporated the IFC Conditions; and
    - in any event, since both parties had acted as though the IFC Conditions applied, Harvey should be estopped or prevented by the Court from denying that the IFC Conditions applied.

    These issues had a real impact on the parties' rights and entitlements. If Harvey was right it would be entitled to payments for the work done on a quantum meruit basis and would only be obliged to complete the works within a reasonable time. If ADI was right then payment for work done would be on a lump sum basis (subject to adjustment for variations etc.) and completion of the works would be fixed at 25 September 1998 (subject to extensions of time) with liquidated damages being payable for late completion.

    Terms of the Contract

    Traditionally, the English courts have adopted a conservative approach to the interpretation of contracts. They have remained mute, refusing to speak for the parties and make anything other than a literal interpretation of the strict wording of the contract. Whilst referring to the tender price, the Harvey letter of intent refers to the IFC Conditions as being something that the parties intended to use and refers to executing a formal contract on the basis of the IFC Conditions at some point in the future. On a traditional approach, this expression of future intention would arguably not be sufficient to incorporate the IFC Conditions into the contract itself.

    Similarly, if the parties were not yet 'of one mind' as to the contract terms, the English courts would traditionally be less inclined to find that a contract had been concluded. Thus Harvey argued that, since the parties had seemingly not decided on the details of the IFC Conditions, in particular whether the IFC Sectional Completion Supplement was to be incorporated, they could not yet have adopted them. Instead, the parties had only been of one mind (and so the terms of their contract were restricted to) the simple wording of the letter of intent. Again, on a traditional approach, Harvey's argument would have carried some weight.

    However, as summarised in Harvey, the Courts now adopt a more vocal approach to the interpretation of contracts:

    - the Courts now adopt a practical approach to whether and what agreement should be upheld;
    - niceties which might on a more traditional approach have been regarded as precluding agreement will not now be so regarded unless essential to the basis of the agreement;
    - this is the more so where the contract has been fully performed.

    In taking such a practical approach, the Court gave relatively little weight to the fact that the letter of intent did not incorporate the IFC Conditions in a formalistic way. Greater weight was given to the fact that (i) the tender sum quoted was based on the IFC Conditions (as included in the invitation to tender), (ii) Harvey's tender did not object to the IFC Conditions contained in the invitation to tender and (iii) Harvey had conceded that the scope of work under the letter of intent was the same as that set out in the tender documentation. Reading this as a whole and despite the failure of the parties to state their terms clearly, the Court held that the parties had contracted on the IFC Conditions.

    The principle that 'niceties' should not preclude agreement was held to extend so far that uncertainty as to whether the IFC Sectional Completion Supplement had been incorporated was deemed something that did not "affect the nature of [the] agreement". Following the approach taken in Stent Foundations Ltd -v- Carillion Construction (Contracts) Ltd (formerly Tarmac Construction (Contracts) Ltd) [2000] All ER (D) 984, the Court took the view that, since the works had already been performed, it was "water under the bridge" whether or not the Supplement had been incorporated. This was despite the fact that, in order to assess the appropriate extensions of time (that is, whether they should apply to the flats as a whole or to each flat on a sectional basis), the Court had to take a decision on whether the Supplement had been incorporated. Far from being an irrelevance, the inclusion (or exclusion) of the Supplement affected the damages awarded. Nevertheless, the Court held that on a practical approach the question of whether the Supplement was incorporated did not impact on whether the IFC Conditions were part of the contract.

    Estoppel Argument

    As a back-door route to the same conclusion, the Court also found that Harvey was not entitled to deny that the contract was on the IFC Conditions. It found that during the performance of the works the parties had behaved as if their relationship was governed by the IFC Conditions. In particular, the parties had acted consistently with the IFC terms relating to pricing, certification of work, certification of completion, extensions of time and seemed to have used the IFC procedures for agreeing the final account. Harvey could not now deny that the IFC Conditions applied.

    Conclusions

    In the present case it seems that the Court acted as the voice of reason in applying the IFC Conditions - Harvey's tender did not object to any of the IFC Conditions, its price and scope of work were referable to the IFC Conditions and the day to day running of the works was consistent with the IFC Conditions.

    However, the case serves as a salutary lesson. If you fail to clearly state the terms of your contract from the outset, you risk at the very least unnecessary legal costs arguing over them. In a worst case scenario, you risk the Court being forced to act as ventriloquist to impose terms which you may not have intended. This risk is all the more real in the case of letters of intent which are often drawn up hurriedly on an assumption that a full contract will be entered into shortly and before a dispute arises. In an ideal world of course lawyers would have their way and the 'nicety' of a full contract would be observed. However, this is often commercially unrealistic – loss of time is loss of income. If a letter of intent is necessary, you can reduce the risks identified in Harvey by ensuring your letter of intent:

    - clearly states its principal terms;
    - sets out the outstanding points of negotiation between the parties and, if possible, identifies those considered essential.

    Any letter of intent should also be clear as to whether it is intended to be contractually binding or not and, depending on the requirements of the project, may need to deal with other issues such as intellectual property rights as well.

    Finally, to avoid falling at the final hurdle, you should ensure that your personnel are aware of the agreed and outstanding items and act consistently with these. In so doing, you will minimise the risk of giving rise to an estoppel or variation to your contract.

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    This document is for general guidance and research purposes only, and does not purport to give professional advice. Please check the date at the top of the article; the Workplace Law Network retains historic articles for general research.