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Importance of agreeing price in contract negotiations

In Merit Process Engineering v Balfour Beatty Engineering Services, Edwards-Stuart J considered Balfour Beatty’s application to stay TCC proceedings. Balfour Beatty relied on CPR Part 62.3(2) and section 9 of the Arbitration Act 1996, and argued the parties’ contract incorporated an arbitration clause.

The case underlines the importance of ensuring that the necessary terms of an intended contract, in particular the price, are agreed between parties in order for a contract to be concluded.

Merit Process Engineering Ltd v Balfour Beatty Engineering Services

Balfour Beatty was a sub-contractor to Costain on the Diamond Synchrotron Project. It invited Merit to quote for the installation of pipework and plant, following which a series of negotiations took place during 2003 and 2004.

Merit was invited to start work under a letter of intent sent by Balfour Beatty dated 2 March 2004. That letter was expressed to be “subject to contract” and stated the basis on which Merit would be remunerated if a contract was not concluded between the parties.

A series of letters and emails were then exchanged regarding the terms of the parties’ intended agreement:

  • In an email from Balfour Beatty to Merit on 25 March 2004, the contract price was stated to be £1.6 million.
  • On 26 March 2004, Merit wrote to Balfour Beatty stating the price accepted was £1.6 million.
  • On 30 March 2004, Merit wrote stating that the price was to be £1.637 million. There was no reply to this email and Merit continued to work under the letter of intent.

In December 2004, Balfour Beatty concluded the terms of its sub-contract agreement with Costain. It was accepted that Balfour Beatty had no intention to create legal relations with Merit until that agreement had been concluded. Therefore, it wasn’t until March 2005 that it sent its form of sub-contract agreement to Merit, which included an arbitration clause.

A dispute then arose in correspondence as to whether the contract price should be £1.6 million or £1.637 million and the sub-contract agreement was never signed. Merit continued working regardless, before bringing a claim against Balfour Beatty in 2012.

Had a contract been concluded?

While many terms of the contract had been agreed, Merit argued that no contract had been concluded because there was a dispute as to the contract price. Balfour Beatty, on the other hand, argued that there was agreement on the key terms, and that the remaining dispute related solely to the application of the main contractor’s discount, which did not preclude the conclusion that a contract had been formed.

Edwards-Stuart J rejected Balfour Beatty’s submissions. He held that price was a key term of the contract and that it had not been agreed. Balfour Beatty had contended for a price of £1.6 million, Merit for £1.637 million. The difference broadly reflected the 2.5% main contractor’s discount, which had been in dispute between the parties since the negotiations in 2004. While £37,500 was not a substantial amount in the context of the contract price, it could not be considered “de minimis or otherwise non-essential”. The court recognised the fact that margins on such contracts might be small, and thus £37,500 was not an insignificant sum.

Similarly, Edwards-Stuart J rejected the notion that the £37,500 could be ascribed to an insignificant term about the application of the main contractor’s discount. The reality was that there was a dispute as to price.

Price was such an important contract term that it would either need to be fixed, or some mechanism agreed for fixing it. It was accepted that it might be open to a party to argue that a contract had been concluded notwithstanding that there was no agreement as to the final price, provided there was “a machinery, independent of the parties, by which the price could be fixed”. However, on the facts, Balfour Beatty was unable to point to any machinery by which a price could be arrived at.

Furthermore, while it is well established that a contract may be concluded even though further terms are still to be agreed, Edwards-Stuart J followed Lloyd LJ in Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 in holding that the more important the term is, the less likely the parties would have left it for future discussion. He could not find any suggestion from the parties’ correspondence that Balfour Beatty was willing to be bound by the other terms, leaving the price to be negotiated at a later date. Instead, no concluded agreement had been reached, and thus there was no contract incorporating the arbitration clause.

Accordingly, Merit was entitled to reimbursement of its costs under the letter of intent, and Balfour Beatty’s application for a stay for arbitration was refused.

Importance of concluding a contract

Edwards-Stuart J’s decision is just one of many examples in a construction context where parties to an intended contract have failed to agree terms prior to undertaking work.

It reiterates the importance to any would-be contracting party of ensuring that there is a concluded agreement in order for a binding contract to be formed. If part of the agreement is for an external mechanism to reach agreement as to price, or if part of the agreement is to be reached at a later date, then it is essential that the agreement expressly provides for this. If the parties fail to agree such terms, they risk forfeiting the benefit afforded by those terms that they have managed to agree.

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