It is not uncommon for two parties, who intend to enter into a formal, written contract, not to sign such an agreement before one of the parties does some work for the other. This will often not pose a problem: the parties will later conclude the formal contract, and the agreed contract price will cover the work already done. However, this will not always be the case. Sometimes, no written contract will ever be signed. In such circumstances, it is difficult to establish, first, whether the party who has done some work can recover anything and, secondly, on what basis that party might recover.
There has long been disagreement regarding the appropriate basis of recovery: does the recipient of the work have to pay because of an implied agreement, or in order to reverse an unjust enrichment?Footnote 1 This analytical distinction is not inevitably crucial; the “reasonable value” of the work provided by one party may represent both that party's loss and the other's gain.Footnote 2 But the claimant's loss and defendant's gain may not always be the same; indeed, the defendant may not derive any benefit from the claimant's work.Footnote 3 Moreover, unjust enrichment encounters difficulties irrelevant to contract. For example, what is the identifiable benefit? Can it be subjectively devalued? What is the ground of restitution? Has there been a change of position? Was the claimant a risk-taker, and does this bar restitution? Conversely, a contractual approach requires the terms of the agreement to be identified and interpreted, and issues of mitigation to be resolved. Such matters can be circumvented by a claim in unjust enrichment.
This contract/unjust enrichment debate is of theoretical and practical importance. In 2009, the Court of Appeal, in Whittle Movers Ltd. v. Hollywood Express Ltd. Footnote 4 and RTS Flexible Systems Ltd. v. Molkerei Alois Müller GMBH & Co. K.G. (UK Productions),Footnote 5 overturned the decisions of the courts below, which had found that a contract arose between the parties. The appellate court, led by Waller L.J. in both cases, maintained that such a conclusion was impossible, and instead favoured restitutionary reasoning. The “no contract” stance adopted by the Court of Appeal must, however, now be doubted in the light of the decision of the Supreme Court in Müller: the Supreme Court insisted that a contract had been concluded by the parties.Footnote 6
This paper will focus on the impact of these recent decisions. It will be argued that a contractual analysis is much to be preferred. It is clear that, if there is a contract, a claim in unjust enrichment will necessarily fail.Footnote 7 Therefore, deciding whether or not a contract exists cannot be avoided. The creation of a contract depends upon finding an offer and acceptance, supported by consideration and an intention to create legal relations. In “anticipated contract” cases, the offer may lie either in the defendant's asking the claimant to do the work, or in the claimant's tendering the work. The acceptance will subsequently be either the claimant's carrying out the work, or the defendant's acceptance of the work. Since parties rarely do work for nothing, and this is widely known, it seems reasonable to suggest that both parties will realise that there will be an obligation to pay for the work done, and that legal relations are intended to be created.
The scope for finding a contract seems to be reasonably wide. But is it wide enough? Is there still room for a restitutionary approach in some instances which are not caught by the law of contract? It is suggested not: where no agreement can be found, there should not be a restitutionary remedy. The most likely ground of restitution here seems to be total failure of consideration.Footnote 8 But for this ground of restitution to succeed, it still needs to be shown that the defendant realised that he would have to give something in return for the benefit received.Footnote 9 If the defendant knew that he would have to pay, and the claimant expected to be paid, it inexorably follows that the parties were agreed on the need to pay something. If the parties did not reach even this level of agreement, then there is no room for unjust enrichment.
Any claim in unjust enrichment may be barred on the basis that the claimant was a risk-taker. After all, “there is nothing unjust about being visited with the consequences of a risk which one has consciously run”.Footnote 10 If one party performs services prior to the agreement being concluded, then it may be argued that that party was taking a risk by “jumping the gun” and performing without having reached an agreement with the other side. Such a party deserves no sympathy. As the Supreme Court summarised, the better approach “is to agree first and to start work later”.Footnote 11 Quite right. Performing without an agreement already in place is the wrong way round and should be discouraged. Contract law would not award a remedy, and nor should unjust enrichment.Footnote 12
The approach of the Supreme Court in Müller is far preferable to that recently adopted by the Court of Appeal. The contractual approach provides a remedy in all cases where a remedy is appropriate. If no contract can be found, then there should be no remedy. There is neither room nor need for a restitutionary analysis. Judges are clearly becoming more comfortable with claims in unjust enrichment, but the law of unjust enrichment should not be undermined by cramming things within its scope which do not belong.
I. A Restitutionary Approach: No Consensus
Decisions which rely upon a restitutionary approach often cite British Steel Corporation v. Cleveland Bridge and Engineering Co. Ltd. Footnote 13 The parties were negotiating for the sale of steel nodes. During the course of those negotiations, the claimants produced the nodes and delivered them to the defendants. The defendants accepted the nodes, but refused to pay. Goff J. found that no contract had been concluded since the parties had not yet reached agreement on important matters, including liability for late delivery. However, the restitutionary claim did succeed: the defendant had to pay a reasonable sum to the claimant to reverse its unjust enrichment.
Although only a decision of first instance, this case has proved to be highly influential. It suggests that if essential terms are still to be agreed, then there will not be a contract.Footnote 14 However, it seems unsatisfactory to state that the parties have not reached any agreement when one party has provided work and services to another which have in fact been accepted. Surely there has been some agreement, which requires some remuneration? Admittedly, the still-to-be-agreed terms do not form part of the agreement made, but there is no reason why the fact that one particular contract was anticipated should preclude the court from finding that a different contract was actually made.Footnote 15 Moreover, it may be unreasonable to suggest that a term was truly essential if the contract has actually been performed.Footnote 16
In The Aramis, Bingham L.J. observed that “it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract”. Footnote 17 This statement is entirely appropriate, but it is not clear that it sits comfortably with British Steel: would the parties really have acted in the same manner in the absence of a contract?
In any event, the Court of Appeal in Whittle was content to apply both The Aramis and British Steel.Footnote 18 In Whittle, the parties were negotiating a long-term, written contract for the distribution and warehousing of food and drink products. During the negotiations, the claimant began to perform the envisaged services, and the defendant paid for them. After a relatively short period of time, the defendant cancelled the arrangement. The claimant argued that this was a breach of contract. Both the trial judge and Court of Appeal agreed that no long-term agreement had been reached, since negotiations were still ongoing. But that did not preclude the claimant from contending that an interim, collateral contract had been concluded by the parties' conduct for the services actually rendered. This argument was attractive to the judge, but not the Court of Appeal; Waller L.J. described such a conclusion as “not tenable”.Footnote 19 This is unduly rigid: there seems to be no reason why the judge was not entitled to find that a contract had been concluded on the facts. Whether or not a contract is concluded by conduct is essentially a question of fact.Footnote 20 There may legitimately be some debate about what price should be paid under that contract,Footnote 21 but that should not distract the court from the important point that the parties were agreed that the services would be paid for, and that the consensual nature of the transaction means that it rightfully belongs within the domain of the law of contract.
The judgment of Waller L.J. in Whittle was mirrored in the same judge's decision in the Court of Appeal in Müller. The sidelining of contractual reasoning was unfortunate. Requested services were provided and accepted, and both parties knew that payment would be required. Offer, acceptance, consideration and an intention to create legal relations were all present. A contractual analysis is sufficient and convincing. The reversal of the Court of Appeal's approach in Müller is therefore welcome.
II. A Contractual Approach: Room for Agreement
It has long been clear that where a transaction has been fully performed the court may find a contract. For example, in G Percy Trentham Ltd. v. Archital Luxfer Ltd., Steyn L.J. observed that:
“The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations. It will often make it difficult to submit that the contract is void for vagueness or uncertainty. Specifically, the fact that the transaction is executed makes it easier to imply a term resolving any uncertainty, or, alternatively, it may make it possible to treat a matter not finalised in negotiations as inessential.”Footnote 22
Similarly, in Mamidoil-Jetoil Greek Petroleum Company S.A. v. Okta Crude Oil Refinery A.D., Rix L.J. emphasised that the court should strive “to preserve rather than destroy” bargains, and that, especially in the commercial context, the court would be willing to imply necessary terms in order to uphold a contract.Footnote 23 To this line of case law can now be added the recent decision in Müller.
The claimant, RTS, was negotiating a contract for the construction and installation of equipment to be used by Müller. Detailed negotiations took place, and work began on the basis of a letter of intent. The letter of intent expired, but RTS continued to supply the goods and services to Müller, who paid some, but not all, of the envisaged contract price. A dispute then arose regarding the equipment supplied. The court was asked to determine whether a contract had been concluded and, if so, upon what terms. It is significant that both parties' primary case was that there was a contract between them. RTS argued that the contract contained the “MF/1 terms”, which included a liquidated damages clause. Müller argued that those terms were not part of the agreement. The trial judge found in favour of Müller, but the Supreme Court ultimately disagreed, insisting that the solution which made the most “commercial sense” was that the parties had agreed to the MF/1 terms.Footnote 24
Given the contractual nature of the relationship between the parties, it is unsurprising that there may be arguments regarding the precise nature of what exactly was agreed. But it is suggested that squabbling over the terms of the contract is much more appropriate than disputing the very existence of a contract. The “no contract” approach was only an alternative argument of RTS, but succeeded in the Court of Appeal. The Supreme Court was right to reject this; it was “unrealistic to suppose that the parties did not intend to create legal relations”.Footnote 25 Effect should be given to whatever contract was formed.
Admittedly, there remains scope for disagreement about what agreement was reached. Christopher Clarke J. gave effect to some of the terms negotiated between RTS and Müller, on the basis that negotiations on those points were concluded, but not the MF/1 terms, to which, according to the judge, the parties had not conclusively assented. Such an approach emphasises that the court will not rescue RTS from its decision to perform without a clear, written agreement in place. However, it might result in a bargain that neither side intended to enter into.Footnote 26 Moreover, it may be problematic to “cherry-pick” parts of a contract: during the course of negotiations, term X may appear stable, but later be changed in return for the modification of term Y. It is suggested that an “all-or-nothing” approach has much to commend it: either the totality of the hoped-for written contract should form the basis of the agreement, or it should be disregarded in its entirety. The latter approach would leave the contract very “bare”, and essentially based upon the transaction which has in fact been executed. The agreement could then be filled in through the implication of terms. Most significantly, the court could imply a term that a reasonable price be paid.
The Supreme Court thought that the parties had reached agreement on all relevant terms, including the MF/1 terms, and had accepted that agreement through their conduct.Footnote 27 The judge had been reluctant so to find, particularly since there was a “subject to contract” bar in place: the detailed terms were not to take effect until the relevant documents were executed and signed.Footnote 28 This indicates that the parties did not intend to become legally bound until that occurred.Footnote 29 Parties are naturally free to dictate when and how they enter into contractual obligations, but, as the Supreme Court pointed out, the intention not to be bound before signature could be “waived”.Footnote 30 This must be right: the parties may initially intend to be bound by entering into a written contract, but this intention cannot be irrevocably binding upon them. If they change their minds and wish to enter into binding obligations through another route, then this must be possible. A “subject to contract” clause is no more than an indication that, determined objectively, the parties do not intend to create legal relations until the contract is signed. But, in Müller, the Supreme Court held that the parties must have intended to create legal relations through their conduct, and no longer required an executed and signed contract. The Justices held that “[a]ny other conclusion makes no commercial sense”, and that “the reasonable, honest businessman … whether he was an RTS man or a Müller man … would have concluded that the work should be carried out for the agreed price on the agreed terms … without the necessity for a formal written agreement, which had been overtaken by events”.Footnote 31
This conclusion may be the most appropriate on the facts of the case, but in other circumstances the “subject to contract” bar will remain in place.Footnote 32 The question of whether or not an intention to create legal relations can be objectively ascertained, regardless of a “subject to contract” clause, should be a question of fact for the trial judge. Nevertheless, difficult questions concerning when exactly the “subject to contract” bar is waived remain. It should not be waived simply by agreeing all the terms; the “subject to contract” proviso is intended to protect a party from being bound in such instances. Nor will it necessarily be waived as soon as performance begins and an initial instalment is accepted, as in Whittle. But it does not inevitably follow that the transaction must be fully executed for the “subject to contract” bar to be waived. Indeed, in Müller the Supreme Court considered various options for when the requirement of execution and signature of written documents was dispensed with, and eventually decided upon a date prior to complete performance, as that was when “the die was cast”.Footnote 33
Deciding when the die was cast and the parties intended to be bound on the negotiated terms may not be easy. Indeed, such an intention may be impossible to discern. After all, the Supreme Court stated that “it cannot be said that there will always or even usually be a contract on the terms that were agreed subject to contract. That would be too simplistic and dogmatic an approach. The court should not impose binding contracts on the parties which they have not reached. All will depend upon the circumstances”.Footnote 34 Very sensible. But just because the parties have not reached a binding contract on the detailed terms under negotiation, that does not preclude finding a more minimal contract through the parties' performance. The long-term, “principal” written agreement may remain “subject to contract”, but a collateral agreement to pay for work actually done does not labour under the same bar.
Whilst the approach taken by the Supreme Court suggests that it will be rare for there not to be an intention to create legal relations, and hence rare that there will not be some sort of contract between the parties, the Justices did emphasise that each case turns on its own particular facts. Thus British Steel is not necessarily incompatible with Percy Trentham; the Supreme Court thought that “[t]he decision in the British Steel case was simply one on the other side of the line”. Footnote 35 However, it is submitted that the thrust of the judgment in Müller suggests that very rarely will a term be considered “essential” if performance has been requested and accepted. The approach in British Steel should be sidelined.
III. Conclusion
It may be seen as rather conservative to suggest that instances of “anticipated contract” fall exclusively within the realm of contract, rather than the exciting new world of unjust enrichment. However, in situations where the formation of a contract is clearly at the forefront of the parties' minds during the course of negotiations, it seems appropriate to focus upon whether an agreement has been reached, and upon what terms. If there is no agreement, the claimant should not recover anything, and should suffer the consequences of performing without the security of a contract. This is entirely satisfactory, particularly since the claim brought seems essentially concerned with recovering losses rather than reversing gains; forcing compensation within unjust enrichment is obviously problematic.Footnote 36
Moreover, it is not even certain that on the facts of Müller and Whittle a restitutionary claim would necessarily succeed. The Court of Appeal suggested that it might, but did not need to decide the point in either case. However, identifying the ground of restitution may not be a straightforward matter: since the defendants in each case did pay something to the claimants, it is difficult to maintain that the consideration totally failed. Partial failure of consideration is not a ground of restitution.Footnote 37 This obstacle may yet be overcome by the courts,Footnote 38 but the law has not reached this point in its development. The law of contract, by contrast, is better developed and untroubled by such issues.
Given the existence of an offer, acceptance, and intention to create legal relations, the law of contract can do all the work needed in this area. The major problem associated with finding a contract seems to be that there may not be an “intention to be bound”, either because essential terms are yet to be agreed, or detailed negotiations remain “subject to contract”. Neither objection poses undue difficulty in a situation where a remedy is desirable.Footnote 39 It is highly unlikely that a term should be considered to be “essential” if the agreement has nevertheless been performed. Moreover, a term essential to an anticipated agreement may not be essential to the contract actually formed. Similarly, any “subject to contract” bar may have been waived through the parties' conduct, or circumvented because the contract actually formed between the parties does not include the terms which were negotiated by them, but not yet intended to have legal effect.
It is only if a contract is found that it can be concluded with confidence that a claimant was not taking a risk by performing his side of the bargain. In the absence of such agreement, he should be condemned as a risk-taker and any restitutionary claim should therefore be barred. It is only through this analysis that the Supreme Court's plea in Müller will be taken seriously: “[t]he moral of the story is to agree first and to start work later”.Footnote 40
