Informal agreements during the course of construction projects

The TCC has recently considered whether email exchanges made during the course of informal account negotiations were sufficient to constitute a binding contract between the parties. The case provides a useful reminder that agreements reached during the course of such negotiations will usually be binding unless a party makes clear that it does not intend to be bound until a formal contract is signed.

“Subject to contract”

Parties to construction contracts will often reach informal agreements over the valuation of variations and other interim or final account issues. It is sometimes thought that such agreements are not binding until recorded in a formal agreement or that phrases such as “without prejudice” will prevent a binding agreement from coming into existence. However, the law will usually give force to such agreements unless one of the parties has made it clear that they will not be bound until a formal contract is signed. The most common way to achieve this is by one party heading their communications with the words, “subject to contract”.

Mi-Space (UK) v Bridgwater Civil Engineering

Had those three words been used, the parties in the present case may have been faced with a very different outcome. Mi-Space and its sub-contractor, Bridgwater, were in dispute over an interim payment which had led to Bridgwater suspending works. Settlement discussions took place via email with Mi-Space making an offer to Bridgwater to make an interim payment if Bridgwater withdrew its claim relative to the interim application and restarted works. Bridgwater agreed, payment was made and the works restarted. Whilst the emails were marked “without prejudice”, the tag was removed in the final email exchange (as the offering party put it) “to allow you to formally accept”. A few days later, Mi-Space sent a contract to Bridgwater to formalise the agreement they had reached by email. Bridgwater refused to sign. Bridgwater asserted that the agreement in the email chain was “subject to contract” and not binding on the parties.

Bridgwater initiated adjudication on the interim application and won. Mi-Space then brought proceedings to challenge the decision of the adjudicator. Mi-Space argued that the email exchange had settled the matter and there was a binding agreement between the parties. In particular, they noted the absence of the phrase “subject to contract” or anything else to that effect. The judge agreed with Mi-Space on the basis that there was a “clear and properly recorded” offer and acceptance in the email chain. The reference in the final emailed offer to a “formal acceptance in writing of this agreement” required only an acceptance in writing (which was sent by reply email) and was not sufficient to make the agreement “subject to contract”. Neither did the use of the “without prejudice” label assist Bridgwater and the judge noted that, even were that label to have been used (mistakenly) by Brigwater to mean “subject to contract”, it had been removed from the final exchange of emails to allow Brigwater to “formally accept” the agreement.

Conclusions and implications

Whether or not parties will be bound by agreements reached during the course of informal negotiations will always be dependent on the circumstances and as this decision notes “issues such as this are notoriously fact-specific”. Nevertheless, the case is a useful reminder that correct usage of phrases such as “without prejudice” and “subject to contract” can make a real difference. Use of the “subject to contract” tag is not always determinative as to whether the parties are bound – other circumstances such as the behaviour of the parties may also be relevant. However, in the absence of any evidence that the “subject to contract” tag has been waived or superseded, it will usually carry the day.

References:

Mi-Space (UK) Ltd v Bridgwater Civil Engineering Ltd [2015] EWHC 3360 (TCC)