Hescorp Italia SpA v Morrison and Impreglio (2000) TCC

© Daniel Atkinson 2000     9 April 2000

It often happens in the construction industry, that the pressing need to get on and complete construction leaves behind the completion of the contractual arrangements. Main contractors in particular will use minutes-of-meeting proforma to record agreement with subcontractors and will issue their standard subcontract orders without necessarily reaching agreement on all matters. Frequently the subcontract works is completed without formal agreement. The main question then is whether there is indeed a contract at all. His Honour Judge John Hicks QC gives practical and useful guidelines in his decision on an application for summary judgment in Hescorp Italia SpA v Morrison and Impregilo (2000) TCC.

The facts of this particular case will strike a familiar chord with contractors and subcontractors alike. The parties had started negotiations for a subcontract for the design and erection of structural steelwork at the "Arena and Leisure World" at Spon Street, Coventry. They both had in mind to enter into a formal contract in the form of a deed, if agreement was reached.. Hescorp started production of steelwork in October 1998 without agreement. There was a "pre-order meeting" in which the pre-printed minutes of meeting were annotated with the results of the discussions. Matters such as programme and liquidated damages were shown as still to be agreed.

On 25th January 1999 Hescorp started the subcontract works on site. On the same date the main contractor, a Joint Venture of Morrison and Impregilo, issued Hescorp a "sub-contract order". Hescorp was asked to sign and return the order and all incorporated documents. Hescorp did not do so. Meanwhile work continued. Various meeting were held and letters exchanged. On 20^th April 1999 the subcontract work was completed without a formal contract. Discussions continued. Hescorp returned the subcontract order with its own amendments. The Joint Venture rejected the amended order and issued another. Inevitably disputes arose on the amount due for payment.

Eventually Hescorp applied for summary judgment and/or for an order for interim payment. Hescorp claimed ,397,025.14 as the value of the work it had done at the Joint Ventures request on the basis that there was no contract. Morrison alleged that a contract had been entered into, although not in the formal manner anticipated. Morrison claimed that the contract price was ,362,500.00. It also counterclaimed ,276,945.81 as damages for delay together with estimated damages of more than ,100,000.00 it might have to pay to the employer for the same reason.

His Honour Judge John Hicks QC set out the familiar law relating to the formation of contract. The necessary and sufficient conditions for contract are agreement, consideration and contractual intent. The legal consequence of negotiations which are recorded in documents are primarily to be resolved by interpreting the documents in their factual setting. The wishes and intentions of the individuals participating and their beliefs as to the meaning of documents are irrelevant except where shared knowledge or understanding at the time may be part of the factual setting.

The question in this case was whether all essential terms were ever settled. His Honour Judge John Hicks QC reviewed the decision of the Court of Appeal in Pagnan S.p.A. v Feed Products Ltd [1987] 2 Lloyd's LR 601 and extracted six relevant propositions of law as follows:

1. In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole.

2. Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary "subject to contract" case.

3. The parties may intend that the contract shall not become binding until some further term or terms have been agreed.

4. Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled.

5. If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.

6. There is no contract if the parties are not in agreement on what they regard as an essential term. It is the parties who are "the masters of their contractual fate". The more important the term the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called "heads of agreement".

His Honour Judge John Hicks QC then applied the above principles to the facts of the case, which involved two separate issues.

The first issue was the requirement stated by the parties that the subcontract should be in some specified form, in this case executed as a deed. The requirement may be one of two types. The effect may be that until so embodied the contract is not binding. That is an example of the ordinary "subject to contract" case in proposition (2) above. On the other hand the effect may be that if a binding contract is entered into without the specified formality, one of its terms will be that it shall be embodied and executed in the appropriate form. Deciding the category of requirement involves deciding the common intention of the parties and, if that intention is expressed in a document, the true construction of that document.

As an example, the facts in J. Jarvis & Sons PLC v Galliard Homes Ltd (1999) CA were such that there was no contract because (among other reasons) the existence of a binding contract was subject to the execution of an agreement under seal. In that case the letter of intent expressly dealt with the method by which Jarvis was to be remunerated in default of such an agreement. That provision had the effect of making the parties’ dealings "subject to contract".

In the instant case it was held that it could not be said that the Joint Venture had no real prospect of succeeding in its argument that there was a contract. Since that was the test for allowing summary judgment, Hescorp would have failed on its application if this was the only issue.

The second issue, was the alleged agreement on terms for the date of completion and the level of liquidated damages. After examining the negotiation history, His Honour Judge John Hicks QC found that there was never agreement on both terms simultaneously. The negotiations had developed into a dispute about the establishment and quantification of a claim by Hescorp for delay. Both parties well understood this, and they regarded the completion date as an essential term requiring to be settled if there were to be a contract.

Applying the above principle 6, it was held that the Joint Venture had no real prospect of establishing that a contract was entered into. It followed that the Hescorp was entitled to summary judgment and entitled to be paid for its work, as on a quantum meruit. Since there was no contract then the Joint Venture could not pursue its counterclaims.

This appeared to dispose of the issues, but the Joint Venture raised a defence against the claim in quantum meruit which proved crucial. It submitted that the value of Hescorp’s work should be reduced because of delays in carrying it out or because defects had, in addition to making the work itself less valuable, caused extra expense to the Joint Venture or exposed it to claims by the employer.

The question was whether there was no real prospect of the Joint Venture succeeding on this basis. The Court of Appeal had previously held in Crown House Engineering Ltd v Amec Projects Ltd (1989) 48 BLR 32 that this particular legal issue was not appropriate for determination in summary proceedings and this was followed in this case. The legal point had not previously been determined. Accordingly, since a quantum meruit claim is, in the absence of an unqualified admission as to quantum, inherently unliquidated His Honour Judge John Hicks QC concluded that Hescorp was not entitled to summary judgment for any specified sum of money.