British Steel Corporation v. Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504, Queen’s Bench Division

The parties were involved in negotiations for the supply of steel components. The defendants (‘CBE’) sent to the plaintiffs (‘BSC’) a letter of intent which stated their intention to enter into a contract and to do so on their own standard terms. The plaintiffs did not respond to this, but went ahead with the manufacture of the components required, expecting a formal offer to follow soon. Negotiations continued between the parties over the specifications of the steel components, but no agreement was reached on matters such as progress payments, and liability for loss arising from late delivery. The defendants refused to pay for the work done and instead informed the plaintiffs that they were claiming damages for late delivery and that this claim exceeded the plaintiffs’ claim for the contract price. The positions adopted by the parties in the litigation were slightly unusual. The plaintiffs contended that no contract had been concluded but that they were entitled to recover the reasonable value of the work done (referred to as a ‘quantum meruit’ claim) in ‘quasi-contract’ (or, to use the terminology more commonly used today, the law of restitution). The defendants, on the other hand, submitted that a contract had been concluded between the parties. It was necessary for the defendants to establish the existence of a contract in order for them to be able to bring a counter-claim for damages for the loss suffered as a result of the alleged late delivery of the components and their delivery out of sequence. Robert Goff J first considered whether or not a contract had been concluded between the parties before turning to consider the plaintiffs’ restitutionary claim.

Robert Goff J

There can be no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement: everything must depend on the circumstances of the particular case. In most cases, where work is done pursuant to a request contained in a letter of intent, it will not matter whether a contract did or did not come into existence, because, if the party who has acted on the request is simply claiming payment, his claim will usually be based on a quantum meruit, and it will make no difference whether that claim is contractual or quasi-contractual. Of course, a quantum meruit claim (like the old actions for money had and received and for money paid) straddles the boundaries of what we now call contract and restitution, so the mere framing of a claim as a quantum meruit claim, or a claim for a reasonable sum, does not assist in classifying the claim as contractual or quasi contractual. But where, as here, one party is seeking to claim damages for breach of contract, the question whether any contract came into existence is of crucial importance.

As a matter of analysis the contract (if any) which may come into existence following a letter of intent may take one of two forms: either there may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other or there may be what is sometimes called an ‘if’ contract, i.e. a contract under which A requests B to carry out a certain performance and promises B that, if he does so, he will receive a certain performance in return, usually remuneration for his performance. The latter transaction is really no more than a standing offer which, if acted on before it lapses or is lawfully withdrawn, will result in a binding contract.

The former type of contract was held to exist by Mr Edgar Fay QC, the Official Referee, in Turriff Construction Ltd v. Regalia Knitting Mills Ltd (1971) 202 EG 169 and it is the type of contract for which counsel for CBE contended in the present case. Of course, as I have already said, everything must depend on the facts of the particular case but certainly, on the facts of the present case (and, as I imagine, on the facts of most cases), this must be a very difficult submission to maintain. It is only necessary to look at the terms of CBE’s letter of intent in the present case to appreciate the difficulties. In that letter, the request to BSC to proceed immediately with the work was stated to be ‘pending the preparation and issuing to you of the official form of sub-contract’, being a sub-contract which was plainly in a state of negotiation, not least on the issues of price, delivery dates, and the applicable terms and conditions. In these circumstances, it is very difficult to see how BSC, by starting work, bound themselves to any contractual performance. No doubt it was envisaged by CBE at the time they sent the letter that negotiations had reached an advanced stage, and that a formal contract would soon be signed but, since the parties were still in a state of negotiation, it is impossible to say with any degree of certainty what the material terms of that contract would be. I find myself quite unable to conclude that, by starting work in these circumstances, BSC bound themselves to complete the work. In the course of argument, I put to counsel for CBE the question whether BSC were free at any time, after starting work, to cease work. His sub[1]mission was that they were not free to do so, even if negotiations on the terms of the formal contract broke down completely. I find this submission to be so repugnant to common sense and the commercial realities that I am unable to accept it. It is perhaps revealing that, on 4 April 1979, BSC did indeed state that they were not prepared to proceed with the contract until they had an agreed specification, a reaction which, in my judgment, reflected not only the commercial, but also the legal, realities of the situation.

I therefore reject CBE’s submission that a binding executory contract came into existence in this case. There remains the question whether, by reason of BSC carrying out work pursuant to the request contained in CBE’s letter of intent, there came into existence a contract by virtue of which BSC were entitled to claim reasonable remuneration, i.e. whether there was an ‘if’ contract of the kind I have described. In the course of argument, I was attracted by this alternative (really on the basis that, not only was it analytically possible, but also that it could provide a vehicle for certain contractual obligations of BSC concerning their performance, e.g. implied terms as to the quality of goods supplied by them). But the more I have considered the case, the less attractive I have found this alternative. The real difficulty is to be found in the factual matrix of the transaction, and in particular the fact that the work was being done pending a formal sub-contract the terms of which were still in a state of negotiation. It is, of course, a notorious fact that, when a contract is made for the supply of goods on a scale and in circumstances such as the present, it will in all probability be subject to standard terms, usually the standard terms of the supplier. Such standard terms will frequently legislate, not only for the liability of the seller for defects, but also for the damages (if any) for which the seller will be liable in the event not only of defects in the goods but also of late delivery. It is a commonplace that a seller of goods may exclude liability for consequential loss, and may agree liquidated damages for delay. In the present case, an unresolved dispute broke out between the parties on the question whether CBE’s or BSC’s standard terms were to apply, the former providing no limit to the seller’s liability for delay and the latter excluding such liability altogether. Accordingly, when, in a case such as the present, the parties are still in a state of negotiation, it is impossible to predicate what liability (if any) will be assumed by the seller for, e.g., defective goods or late delivery, if a formal contract should be entered into. In these circumstances, if the buyer asks the seller to commence work ‘pending’ the parties entering into a formal contract, it is difficult to infer from the buyer acting on that request that he is assuming any responsibility for his performance, except such responsibility as will rest on him under the terms of the contract which both parties confidently anticipate they will shortly enter into. It would be an extraordinary result if, by acting on such a request in such circumstances, the buyer were to assume an unlimited liability for his contractual performance, when he would never assume such liability under any contract which he entered into.

For these reasons, I reject the solution of the ‘if’ contract. In my judgment, the true analysis of the situation is simply this. Both parties confidently expected a formal contract to eventuate. In these circumstances, to expedite performance under that anticipated contract, one requested the other to commence the contract work, and the other complied with that request. If thereafter, as anticipated, a contract was entered into, the work done as requested will be treated as having been performed under that contract; if, contrary to their expectation, no contract was entered into, then the performance of the work is not referable to any contract the terms of which can be ascertained, and the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as has been done pursuant to that request, such an obligation sounding in quasi contract or, as we now say, in restitution. Consistently with that solution, the party making the request may find himself liable to pay for work which he would not have had to pay for as such if the anticipated contract had come into existence, e.g. preparatory work which will, if the contract is made, be allowed for in the price of the finished work (cf William Lacey (Hounslow) Ltd v. Davis [1957] 2 All ER 712). This solution moreover accords with authority. . . . I only wish to add to this part of my judgment the footnote that, even if I had concluded that in the circumstances of the present case there was a contract between the parties and that that contract was of the kind I have described as an ‘if’ contract, then I would still have concluded that there was no obligation under that contract on the part of BSC to continue with or complete the contract work, and therefore no obligation on their part to complete the work within a reasonable time. However, my conclusion in the present case is that the parties never entered into any contract at all.

In the course of his argument counsel for BSC submitted that, in a contract of this kind, the price is always an essential term in the sense that, if it is not agreed, no contract can come into existence. In support of his contention counsel relied on a dictum of Lord Denning MR in Courtney & Fairbairn Ltd v. Tolaini Bros (Hotels) Ltd [1975] 1 All ER 716 at 719 to the effect that the price in a building contract is of fundamental importance. I do not however read Lord Denning MR’s dictum as stating that in every building contract the price is invariably an essential term, particularly as he expressly referred to the substantial size of the contract then before the court. No doubt in the vast majority of business transactions, particularly those of substantial size, the price will indeed be an essential term, but in the final analysis it must be a question of construction of the particular transaction whether it is so. This is plain from the familiar trilogy of cases which show that no hard and fast rule can be laid down but that the question in each case is whether, on a true construction of the relevant transaction, it was consistent with the intention of the parties that even though no price had been agreed a reasonable price should be paid (May & Butcher Ltd v. R (1929) [1934] 2 KB 17, W N Hillas & Co Ltd v. Arcos Ltd (1932) 147 LT 503 and Foley v. Classique Coaches Ltd [1934] 2 KB 1). In the present case, however, I have no doubt whatsoever that, consistently with the view expressed by Lord Denning MR in Courtney & Fairbairn Ltd v. Tolaini Bros (Hotels) Ltd, the price was indeed an essential term, on which (among other essential terms) no final agreement was ever reached.

It follows that BSC are entitled to succeed on their claim and that CBE’s set-off and counterclaim must fail. But, in case this matter should go further, I propose, having heard the evidence and the submissions of the parties, to express my opinion on the question whether, if BSC were under any obligation to deliver the goods in a reasonable time, they were in breach of that obligation. In this part of my judgment, I do not propose to consider any question of delivery out of sequence; an obligation to deliver in a certain sequence could only have arisen from an express term in a contract between the parties, and I am satisfied that no such express term can possibly be said to have been agreed in the present case and if any court should hereafter form a different view, the difference between the actual and contractual order of delivery can be ascertained without difficulty.