Developments in contract: Interim contracts

Principles

• An offer may be accepted by conduct, i.e. a party performing its obligations under the offer. This is sometimes called an “if” contract or standing offer, meaning that if acted on before the offer lapses or is withdrawn, it will result in a binding contract.

• On finding that there is a contract by acceptance, it might be necessary for the Court to determine what terms were incorporated into the contract. Where one party had proposed terms, the court will look for unqualified assent to them by the other party through words or conduct.

• The fact that the parties intend to complete a wider agreement in due course that would encompass the current work does not prevent the interim contract being binding until that wider contract is concluded.

Recent developments

• In Arcadis Consulting v AMEC (BCS) multiple versions of the terms and conditions for two major construction projects had been exchanged but no agreement was ever reached. AMEC asked Arcadis to proceed with works on one project in accordance with “the terms and conditions we are currently working under”, referring to the latest draft agreement on the parallel project between the same parties. When Arcadis’s design work was alleged to be defective, it sought to rely on a limitation of its liability contained in that draft agreement.

• The Court of Appeal held that the instructions to proceed on ‘the terms and conditions currently being worked under’ created an interim contract, pending finalisation of the formal contract and based on a specific version of the draft contract, rather than a “simple contract” for the work to be done on a quantum meruit basis.

• The draft contract contained a limitation on liability and by asking Arcadis to start works on the basis of the draft terms as they stood, AMEC agreed to be bound by those until the wider agreement was finalised. As that never happened, an interim agreement bound both parties and included the limitation of Arcadis’s liability.

• The Court found that any other result would be “extraordinary” as Arcadis would never have entered into a contract without a limitation on its liability.

What this means

• It is common for works to commence in projects of various kinds before the contract documentation has been finalised. Where the contract never gets finalised, this will create an interim contract, the terms of which may have to be deduced from correspondence and the exchange of draft agreements.

• Where work starts without finalisation of the contract, parties should consider what key terms are needed in the interim contract and seek to agree those expressly. The risk if a “simple contract” is found to have governed the works is that it would exclude terms the parties would never have contracted without.