This article summarises the judgment of Mr Alexander Nissen QC in the Technology and Construction Court case of Spartafield Limited v Penten Group Limited [2016] EWHC 2295 (TCC). The central issue of the case was whether a Letter of Intent (LOI) between the developer Spartafield and the contractor Penten was ultimately replaced by a subsequent building contract on the terms of the JCT Intermediate Contract with Contractor’s Design 2011. The judge ultimately found in favour of Spartafield, declaring that a contract on the JCT terms had come into existence, superseding the LOI.

Background to Dispute

On an adjacent site to the oldest manufacturing business in the country, the Whitechapel Bell Foundry, notably casting the Liberty Bell and Big Ben, Spartafield engaged Penten to undertake a three storey roof extension. The parties proceeded under an LOI while the architect was tasked with finalising the JCT contract documentation. The LOI authorised works based on Penten’s cost plan dated 19 July 2013 for £1,000,000. It also stated: “If you are agreeable to the contract being entered into on this basis, please countersign and return the copy letter; the countersigned letter will then form a provisional but binding contract as if a contract had been formally executed in accordance with foregoing terms. The formal contract document will follow in due course.”

Throughout the project, the architect administered the project as would be expected under a JCT contract. Applications for payment, valuation, and certification followed a JCT regime, though this was noted to be consistent with the LOI as well. However, at around the time of the original proposed contract completion date, the parties were still in negotiations which can be witnessed in Penten’s letter on 10 July 2014:

“…We have carried out detailed discussions on the wording of the contract and have confirmed that there are matters included within the contract documents which require amendment. In particular, during our preliminary review of the latest issue of the contracts, we have noted that the Architect’s and M&E specification requires amendment to reflect the VE discussions; and we have been asked to annotate and return the three volumes of documents (and associated drawings) which requires a great deal of time and coordination… We are equally keen to formalise the contract and are working diligently on reviewing the extensive information that has been presented to us however for the reasons stated above we cannot agree to the contract as presently drafted.” (Emphasis added)

Disputes arose, leading to two adjudications. The first concluded that the parties were operating under the LOI – a decision Coulson J held was binding until reviewed in litigation. The second determined a sum due to Penten based on the LOI. Spartafield subsequently commenced the present action seeking declaratory relief that a JCT contract was instead in place. Spartafield contended that a JCT contract came into existence through a combination of the conduct of the parties and agreement on essential terms.

Contract Formation Issue

The judge concluded that a contract was formed on the terms of the JCT Intermediate Contract with Contractor’s Design 2011, superseding the LOI. His key reason was that by the end of May 2014, there was agreement on the essential terms of the contract including the scope, price, contract provisions, an initial completion date, and agreement in principle on collateral warranties. The judge stated that: “All that remained at the end of May 2014 was (a) to ensure that what had been written down corresponded to that which had been agreed and (b) to continue and refine the negotiations in respect of those matters of detail which had not been resolved but which were not central to the conclusion of a contract in law.” [129]

While the JCT form contemplated written execution, the judge found that this was not made a condition precedent to the formation of a contract. He noted the common practice in the construction industry of contracting on standard forms without formal signing: “Within the construction industry, the situation is all too familiar of parties concluding a contract based on a standard form of contract such as the present one even though they do not go through the formal process of signing it. I am quite satisfied that it is perfectly possible to contract on the basis of a JCT standard form despite it not being executed in the matter contemplated in the Articles, at least where there is no additional requirement for execution under seal.” [121]

The LOI typically acts like a stepping stone in the contemplation of a formal contract materialising. The judge interpreted the parties’ conduct as progressing towards that formalisation and reaching a point where the essential terms were agreed. He stated: “I agree it is appropriate to issue a declaration that Spartafield and Penten entered into a contract whereby Penten agreed to carry out the works at 21, Plumbers Row, London E1 1AJ on the basis described above and in substitution for the letter of intent.” [166]

Implications

This judgment reinforces the principle that contracts can be formed through the conduct of the parties, even absent the execution of a formal written contract. Parties operating under an LOI should be mindful of their conduct and communications, as these can objectively indicate the formation of a subsequent, more comprehensive contract.

Parties seeking to argue against the existence of a formal contract after operating under an LOI will need clear evidence that essential terms remained outstanding or that formal execution was a condition precedent to contract formation.