Letters of Intent, Heads of Agreement and Preliminary Agreements

Abstract

Sport marketing is a fast-moving business, involving as it does the competitive acquisition of very valuable and lucrative rights, which allow companies and firms to associate and promote themselves and their products and services with prestigious international sporting events, such as the Olympic Games and the FIFA World Cup. In other words, sports marketing rights involve the transfer of very valuable goodwill, which has been built up in the sporting events concerned over a long period of time, to a corporate or commercial entity for the benefit of its business.

Appendices

Appendices

In the Appendices of this Chapter, the reader will find the Judgements of two important and relevant English Cases, as well as some General Precedents, for comparative and illustrative purposes.

4.1.1 Concluding Remarks

Irrespective of their legal validity and enforceability, all these kinds of preliminary documents, therefore, may be useful and valuable as a kind of ‘aide memoire’ to guide any future negotiations and the drafting of what I might call the real Agreement—that is, the one that will fully represent the deal that the parties have made and, therefore, the one that will be legally binding on them. In other words, Heads of Agreement, Letters of Intent and Preliminary Agreements will be binding in honour only and, as one English Judge once reputedly remarked when faced with moral arguments in a case: ‘this is a Court of Law, not morals!’

Against that strict legal background, under English Law at least, these kinds of preliminary agreements do serve a practical and useful commercial purpose to a certain extent, and, presumably, that is why they seem to be popular, especially in connection with Sports Marketing Agreements of various kinds, and are entered into by the parties in the first place.

Appendices

4.2.1 Appendix 1

All England Law Reports/1984/Volume 1/British Steel Corp v Cleveland Bridge and Engineering Co Ltd—[1984] 1 All ER 504; reproduced with permission Nexis Lexis (UK Law Reports)

[1984] 1 All ER 504

British Steel Corp v Cleveland Bridge and Engineering Co Ltd

Queen’s Bench Division (Commercial Court)

Robert Goff J

6, 9, 10, 11, 12, 13, 16, 17, 18 November, 21 December 1981

Contract—Quantum meruit—Work done in anticipation of contract—No contract concluded—Steel manufacturer negotiating with contractor to make and supply cast-steel products for construction work—Contractor requesting manufacturer to commence production in anticipation of contract being entered into—Manufacturer making and supplying cast-steel products—Parties unable to agree on contractual terms—Whether contractor entitled to value of products on a quantum meruit.

The defendants successfully tendered for the fabrication of steel work in the construction of a building. The design required steel beams to be joined to a steel frame by means of steel nodes. The plaintiffs, who were iron and steel manufacturers, were approached by the defendants to produce a variety of cast-steel nodes for the project. The plaintiffs prepared an estimated price based on incomplete information and sent it to the defendants by telex on 9 February 1979. After further discussions as to the appropriate specifications and technical requirements the defendants sent a letter of intent to the plaintiffs on 21 February which (i) recorded the defendants’ intention to enter into a contract with the plaintiffs for the supply of cast-steel nodes at the prices itemised in the telex of 9 February, (ii) proposed that the contract be on the defendants’ standard form, which provided for unlimited liability on the part of the plaintiffs in the event of consequential loss due to late delivery, and (iii) requested the plaintiffs to commence work immediately ‘pending the preparation and issuing to you of the official form of sub-contract’. The plaintiffs would not have agreed to the defendants’ standard form of contract and intended to submit a formal quotation once they had the requisite information. The plaintiffs did not reply to the letter of intent since they expected a formal order to follow shortly and instead they went ahead with the manufacture of the nodes. The defendants then indicated for the first time that they required delivery in a particular sequence. There were further discussions as to the proper specifications to be met in the manufacture but no final agreement was reached. The specifications were then changed extensively by the defendants after the first castings proved to be unsatisfactory. On 16 May the plaintiffs sent the defendants a formal quotation on their standard form, quoting a significantly higher price with delivery dates to be agreed. The defendants rejected the quotation and again changed the specifications. The plaintiffs went ahead with the manufacture and delivery of the nodes and eventually, at a meeting between the parties on 1 August, the parties reached provisional agreement on the basis of the quotation given on 16 May but they were unable to agree on other contract terms such as progress payments and liability for loss arising from late delivery. By 28 December all but one of the nodes had been delivered, delivery of the remaining node being held up until 11 April 1980 due to an industrial dispute at the plaintiffs’ plant. The defendants refused to make any interim or final payment for the nodes and instead sent a written claim to the plaintiffs for damages for late delivery or delivery of the nodes out of sequence. The amount claimed far exceeded the quoted price. The plaintiffs thereupon sued for the value of the nodes on a quantum meruit, contending, inter alia, that no binding contract had been entered into. The defendants counterclaimed for damages for breach of contract for late delivery and delivery out of sequence and claimed a right of set-off, contending, inter alia, that a binding contract had been created by the various documents, especially the letter of intent, and by the plaintiffs’ conduct in proceeding with the manufacture of the nodes.

Held—A contract could come into existence following a letter of intent, either by the letter forming the basis of an ordinary executory contract under which each party assumed reciprocal obligations to the other, or under a unilateral contract (i.e an ‘if’ contract) whereby the letter amounted to a standing offer which would result in a binding contract if acted on by the offeree before it lapsed or was validly withdrawn. On the facts, an executory contract had not been created by the plaintiffs acceding to the defendants’ request in the letter of intent that they begin work on the nodes pending the issue of a formal sub-contract, since at that stage the parties were still negotiating over material contractual terms such as price and delivery dates and it was therefore impossible to say what those terms were. Furthermore, in all the circumstances an ‘if’ contract had not been created by the plaintiffs carrying out the work, since that work was at that stage being done pending a formal sub-contract, the terms of which were still in a state of negotiation, in particular with regard to the plaintiffs’ liability for consequential loss and delay, so that it was impossible to determine the extent of the liability. Instead, the parties had confidently expected a formal contract to be concluded and the letter of intent had requested the plaintiffs to commence work, which they had done in order to expedite performance under the anticipated contract. Since the parties had ultimately been unable to reach final agreement on the price or other essential terms, the contract was eventually not entered into and therefore the work performed in anticipation of it was not referable to any contractual terms as to payment or performance. In those circumstances, the defendants were obliged to pay a reasonable sum for the work done pursuant to their request. In any event, assuming an ‘if’ contract had been concluded, the plaintiffs would not have been under a contractual obligation to complete the contract work and a fortiori would not have been under any obligation to complete within a reasonable time. Moreover, even if the plaintiffs had been under a contractual obligation to complete the work within a reasonable time, on the facts, they would not have been in breach of that obligation. Accordingly, the plaintiffs were entitled to succeed on their claim and the defendants failed in their counterclaim and set-off (see p. 509 j to p. 510 f and j to p. 511 f and j to p. 512 a and e f, post).

Hick v Raymond & Reid [1891–4] All ER Rep 491 applied.

Notes

For quantum meruit claims, see 9 Halsbury’s Laws (4th edn) paras 692–696, and for cases on the subject, see 12 Digest (Reissue) 145–148, 836–850.

For rights to set-off and counterclaim for breach of contract, see 9 Halsbury’s Laws (4th edn) para 608.

For unilateral contracts, see ibid paras 206, 239, 248, 252.

Cases referred to in judgment

Courtney & Fairbairn Ltd v Tolaini Bros (Hotels) Ltd [1975] 1 All ER 716, [1975] 1 WLR 297.

Foley v Classique Coaches Ltd [1934] 2 KB 1, [1934] All ER Rep 88, CA.

Hillas (W N) & Co Ltd v Arcos Ltd (1932) 147 LT 503, [1932] All ER Rep 494, HL.

Lacey (William) (Hounslow) Ltd v Davis [1957] 2 All ER 712, [1957] 1 WLR 932.

May & Butcher Ltd v R (1929) [1934] 2 KB 17, [1929] All ER Rep 679, HL.

OTM Ltd v Hydranautics [1981] 2 Lloyd’s Rep 211.

Pantland Hick v Raymond & Reid [1893] AC 22, sub nom Hick v Raymond & Reid [1891–4] All ER Rep 491, HL.

Sanders & Forster Ltd v A Monk & Co Ltd [1980] CA Transcript 35.

Turriff Construction Ltd v Regalia Knitting Mills Ltd (1971) 222 EG 169.

Action

By a writ issued on 11 July 1980 the plaintiffs, British Steel Corp (BSC), sued the defendants, Cleveland Bridge and Engineering Co Ltd (CBE) for £229,832·4370 being the total price outstanding for 137 cast steel nodes manufactured, sold and delivered to CBE between 12 July 1979 and 11 April 1980. By their points of defence and counterclaim, CBE admitted liability in the sum of £200,853 but claimed a right of set-off in respect of the sum of £867,735.68 which they counterclaimed against BSC as damages for breach of contract. The facts are set out in the judgment.

Philip Naughton and John Grace for BSC.

Richard Seymour for CBE.

Cur adv vult

21 December 1981. The following judgments were delivered.

Robert Goff J.

In this action the plaintiffs, British Steel Corp (whom I shall refer to as BSC), are claiming from the defendants, Cleveland Bridge and Engineering Co Ltd (whom I shall refer to as CBE), the sum of £229,832·4370 as the price of 137 cast-steel nodes and other related goods sold and delivered to CBE, or alternatively are claiming the like sum on a quantum meruit. In their defence and counterclaim, CBE admit that the goods were sold and delivered to them, and further admit liability in a sum of £200,853; but that admission is subject to a plea of set-off against the sum of £867,735·4368 counterclaimed by them on the ground that BSC had, in breach of contract, delivered the nodes too late and out of sequence. Accordingly CBE’s net counterclaim is for the difference between these two sums, viz £666,882·4368.

An order was made limiting the hearing before this court to certain specified issues. However, after a short discussion at the beginning of the hearing, it was agreed that the hearing would only be extended by a short time if I dealt with the whole question of liability; and since I felt that it was desirable that I should do so, to avoid a possibly unsatisfactory division of the trial into various issues to be tried by different tribunals, I acceded to a joint application to try the whole issue of liability, leaving only quantum to be decided later if necessary, probably by an official referee. In point of fact, by the end of the trial on liability, the quantum of BSC’s claim had been agreed by the parties to be the sum claimed by them in their statement of claim, viz £229,832·4370.

I turn then to the facts of the case. This is a case in which there is no doubt that BSC did in fact manufacture the 137 cast-steel nodes in question at the request of CBE, and did deliver them to CBE. But, despite protracted negotiations between the parties, no formal contract was ever entered into between them. CBE complained that BSC were late in delivering the nodes, and that the causes of delay were (with one minor exception) all within the control of BSC; they also complained that BSC failed to deliver the nodes in the sequence requested by CBE. In these circumstances, two main areas of dispute developed between the parties. First, was there any binding contract between the parties at all, under which the nodes were delivered? CBE contended that there was such a contract, which was to be found in certain documents (including a letter of intent issued by CBE dated 21 February 1979) and the conduct of BSC in proceeding with the manufacture of the nodes. BSC’s primary contention was that no binding contract was ever entered into, and that they were entitled to be paid a reasonable sum for the nodes on a quantum meruit, a claim sounding not in contract but in quasi contract. The motives of the parties in putting their cases in these different ways lay primarily in the fact that, unless there was a binding contract between the parties there was no legal basis for CBE’s counterclaim for damages in respect of late delivery or delivery out of sequence. So far as delivery was concerned, CBE’s submission was that BSC’s obligations, under the contract alleged by them to have come into existence, was to deliver the goods in the requested sequence and within a reasonable time.

The first issue is concerned therefore with an analysis of the legal relationship between the parties. The second issue is whether, if CBE are right in their submission that there was a binding contract as alleged by them, BSC were in breach of that contract in delivering the goods late and out of sequence. This latter issue is concerned primarily with consideration of the various events and difficulties which occurred in production of the nodes by BSC, and deciding whether, in the light of these events, BSC failed to deliver the goods within a reasonable time as alleged by CBE.

It is right that I should record at this stage that, on the arguments as finally developed before me, BSC abandoned an argument that a binding contract was concluded between the parties, on BSC’s standard terms, at a meeting held on 1 August 1979 and also that CBE did not press an argument that there was a contract contained in or evidenced by certain documents. I have no doubt that both parties were right in deciding not to pursue these respective arguments.

Having outlined the issues before the court, I shall now proceed to set out the background facts of the case.

The plaintiffs are, as I have said, BSC; but in this case I am concerned with a profit-making division of BSC, the Forges, Foundries and Engineering Group (FFE). The head office of FFE is at their River Don works at Sheffield; in or near Sheffield they have not only offices, but also a large foundry and a laboratory. Another medium-sized foundry within FFE is at their Craigneuk works at Motherwell, in Scotland; it is with this foundry that I am chiefly concerned in this case. Craigneuk (as I shall call it), although forming part of FFE, has its own general manager and sales manager, and enters into contracts without reference to the head office of the group in Sheffield.

CBE are a company concerned with steel fabrication. Their works are at Darlington and at Port Clarence on Teesside. They form part of the Trafalgar House group of companies.

A company associated with CBE, Cementation (Saudi Arabia) Ltd, in which Trafalgar House hold a substantial shareholding, was concerned in the construction of a bank (known as the Sama Bank) at Dammam in Saudi Arabia. It was intended that CBE should be subcontractors for the fabrication of steel work for the bank. The bank was to be of an unusual construction. The main body of the building was to be suspended from four columns, and was to have a steel lattice-work frame. There was a requirement for nodes for use at the centres of the lattice work, providing the points at which diagonal steel beams would join the lattice work on the surface of the building.

[His Lordship then made the following findings of fact. CBE discovered that BSC had been working on the development of cast steel nodes and accordingly contacted BSC. Thereafter discussions took place between the parties with a view to a contract being entered into for the manufacture of the cast steel nodes for CBE by BSC. BSC prepared an estimated price based on the incomplete information which was then available to it and on 9 February 1979 sent the following telex to CBE:

‘STEEL CASTINGS FOR NODES NODE PLATE DRG 773/73 £1225 EACH NODES DRG 773/41 £941 EACH PROPOSED PRICE FOR REMAINING ITEMS £1300 PER TONNE. PRICES WOULD REMAIN FIXED FOR DURATION OF CONTRACT. CONTRACT WILL BE SUPPLIED IN UNMACHINED CONDITION FINISHED TO NORMAL FOUNDRY STANDARDS. MATERIAL, HEAT TREATMENT AND INSPECTION WOULD BE IN ACCORDANCE WITH INFORMATION CONTAINED IN OUR TELEX DATED 29 JAN 79. PATTERN COSTS £6500 LUMP SUM DELIVERY: COMMENCE DELIVERY IN 10 WEEKS FROM RECEIPT OF ORDER AND FINAL DRAWINGS AT A RATE TO BE AGREED.’

Further discussions on technical aspects and appropriate specifications for the manufacture of the nodes took place between the parties and then on 21 February 1979 CBE sent a letter of intent to BSC which read as follows:

‘SAMA BANK—DAMMAM

We are pleased to advise you that it is the intention of Cleveland Bridge & Engineering Co. Ltd. to enter into a Sub-Contract with your company, for the supply and delivery of the steel castings which form the roof nodes on this project. The price will be as quoted in your telex (Mr Dorrance to Mr Roberts) dated 9th February ‘79 which is as follows: Nodes to drawing No. 773/73 £1225 each Nodes to drawing No. 773/41 £941 each. The price for the remaining items being £1300 per tonne. In addition the pattern costs will be a lump sum of £6500. The form of Sub-Contract to be entered into will be our standard form of sub-contract for use in conjunction with the I.C.E. General Conditions of Contract, a copy of which is enclosed for your consideration. We also enclose a copy of the Client’s fabrication Specification in relation to Structural Steelwork (pp. 5A.1 to 5A.37 incl.) which is to be complied with where applicable. However, the specification for the castings will generally be in accordance with the discussions held at the Consultant Engineer’s offices on 20th February ‘79 at which your Mr Dorrance and other representatives of your company were present. We understand that you are already in possession of a complete set of our node detail drawings and we request that you proceed immediately with the works pending the preparation and issuing to you of the official form of sub-contract.’

In fact BSC were not then in possession of a full set of drawings. BSC did not reply to the letter because a formal order was expected to follow shortly thereafter. BSC would not have agreed to the ICE conditions of contract which provided for unlimited liability for consequential loss arising from late delivery. BSC intended to submit a formal quotation for individual prices once they had a full set of documents from which to make their calculations. In the mean time BSC processed the letter as an order and began preparations for manufacture in order not to delay final deliveries. On 27 February 1979 CBE sent a telex to BSC giving details of test plates which would be required, and also the sequence in which delivery of the nodes was required by CBE. That was the first intimation which BSC had that CBE required the nodes to be delivered in a particular sequence. There were further discussions and negotiations between the parties over the specifications to be met in the manufacture of the nodes and, because little had been agreed, Mr Kain, BSC’s works manager, sent the following telex to CBE on 4 April:

‘THERE ARE FAR TOO MANY UNRESOLVED QUERIES… WE ARE VERY CONCERNED THAT THIS COULD RESULT IN INCREASED COST AND DELAYS AT LATER STAGES DURING MANUFACTURE. WE ARE THEREFORE NOT PREPARED TO PROCEED WITH THIS CONTRACT UNTIL WE HAVE AN AGREED SPECIFICATION COVERING ALL THESE POINTS WHICH HAS BEEN RATIFIED BY CLEVELAND BRIDGE.’

Thereafter there were further discussions between the parties and although a number of matters remained unresolved it was agreed that BSC should go ahead with the manufacture of the first cast. The first experimental nodes cast were not satisfactory and CBE required extensive alterations to the patterns and specifications. The parties met on 15 May and apparently agreed on a further revision of the draft specifications. On 16 May BSC sent CBE a formal quotation on their standard form, quoting a price of £212,100 with the date of delivery to be agreed. This was a substantial increase in the prices quoted in BSC’s telex of 9 February and CBE decided that the increased price was unacceptable. As a result BSC offered to reduce the price by 9%. Meanwhile BSC did all it could to make up production time lost by the rejection of the first cast, and to expedite delivery of the nodes. CBE continued to query the reasons for the price increase and again raised questions over the specifications (which had been revised by CBE on a further occasion since 15 May). Further problems were experienced by BSC in the production of suitable nodes but these were eventually overcome. On 6 July at a heated meeting between the parties BSC urged CBE to accept the quotation of 16 May and to place a formal order with them. CBE responded by tabling a contract on its standard form based on the prices contained in BSC’s telex of 9 February. This contract was rejected by BSC. Despite the failure to agree on a price or other contract conditions BSC went ahead with the casting and delivery of nodes in stages in an effort to comply with CBE’s requirements for delivery. At a meeting between the parties on 1 August 1979 provisional agreement was reached on the price contained in BSC’s quotation of 16 May but the parties were unable to agree at that stage on the other contract conditions, especially those relating to consequential damages and a proposed performance bond.

BSC agreed to submit a revised delivery schedule and to attempt to speed up delivery of the completed nodes. Further disruption was caused to production by an industrial dispute and by further technical difficulties. Eventually both of these difficulties were overcome. Deliveries continued despite a failure to agree the contract terms, especially the mode of payment, and despite CBE’s failure to make any interim payment. By 28 December BSC had delivered all but one of the 137 nodes, the last node being held back by BSC to ensure that payment would be made by CBE. A steelworkers’ dispute began on 1 January 1980 which lasted several weeks with the result that the last node was not delivered to CBE until 11 April 1980. In the meantime CBE refused to make any payment to BSC until the nodes were on site in Saudi Arabia, on the basis that CBE would not be paid by the main contractors until that time. That was inconsistent with CBE’s earlier assurances about progress payments. After a stormy meeting between the parties on 6 February, BSC heard nothing more from CBE about payment, apart from a self-exculpatory letter from CBE two days later, until in April 1980 CBE submitted a written claim to BSC for damages for late delivery, which claim far surpassed BSC’s claim for the price of the goods delivered. CBE’s written claim for damages precipitated BSC’s own action for damages commenced by writ on 11 July 1980 in which CBE counterclaimed and claimed a right of set-off. His Lordship continued:]

Such are the facts of the case. I now turn to the first issue in the case, which is concerned with the legal basis for BSC’s claim for payment, and in particular whether there was any binding contract between BSC and CBE and, if so, what were its terms. As I have already indicated, it is the contention of CBE that there was such a contract; whereas BSC contends that they are entitled to payment in quasi contract.

As I indicated at the beginning of this judgment, CBE alleged two alternative contracts in their points of defence and counterclaim; but the first of these alternatives was not pursued. Their remaining submission was that the agreement between the parties was comprised in the request by CBE to BSC, in their letter dated 21 February 1979, that BSC proceed to manufacture the nodes (viz the request contained in CBE’s letter of intent), the notification by CBE to BSC in their telex dated 27 February 1979 as to the sequence in which delivery of the nodes was required, and the conduct of BSC in proceeding with the manufacture of the nodes. As I have also indicated, although BSC allege in their pleadings that an agreement was reached between the parties, on BSC’s standard conditions, at the meeting of 1 August 1979, the allegation was rightly abandoned by BSC in the course of the hearing, and they advanced their claim for payment simply on the basis of quasi contract.

Now the question whether in a case such as the present any contract has come into existence must depend on a true construction of the relevant communications which have passed between the parties and the effect (if any) of their actions pursuant to those communications. 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 submission 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, [1957] 1 WLR 932). This solution moreover accords with authority: see the decision in Lacey v Davis, the decision of the Court of Appeal in Sanders & Forster Ltd v A Monk & Co Ltd [1980] CA Transcript 35, though that decision rested in part on a concession, and the crisp dictum of Parker J in OTM Ltd v Hydranautics [1981] 2 Lloyd’s Rep 211 at 214, when he said of a letter of intent that ‘its only effect would be to enable the defendants to recover on a quantum meruit for work done pursuant to the direction’ contained in the letter. 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, [1975] 1 WLR 297 at 301 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, [1929] All ER Rep 679, W N Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503, [1932] All ER Rep 494 and Foley v Classique Coaches Ltd [1934] 2 KB 1, [1934] All ER Rep 88). 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.

I turn to the question of delivery within a reasonable time. It was common ground between the parties that the principles I had to apply in this connection were those stated by the House of Lords in Pantland Hick v Raymond & Reid [1893] AC 22, [1891–4] All ER Rep 491, viz that the question of what constituted a reasonable time had to be considered in relation to the circumstances which existed at the time when the contractual services were performed, but excluding circumstances which were under the control of the party performing those services. As I understand it, I have first to consider what would, in ordinary circumstances, be a reasonable time for the performance of the relevant services; and I have then to consider to what extent the time for performance by BSC was in fact extended by extraordinary circumstances outside their control.

[His Lordship then considered the evidence and concluded that a reasonable period for the manufacture of the 137 nodes was 551/2 weeks and that since such a period would have gone well beyond 11 April 1980 when the last node was in fact delivered it followed that if, contrary to his Lordship’s previously expressed opinion, BSC had been bound to complete the work within a reasonable time they would not have been in breach of that obligation. His Lordship continued:]

However, as I have already held, there was in my judgment no obligation on BSC to deliver the nodes within a reasonable time. It follows that BSC are entitled to judgment on their claim in the sum of £229,832·4370 and that CBE’s set-off and counterclaim must be dismissed.

Judgment for the plaintiffs.

Solicitors: Lovell White & King (for BSC); A Paul Powell, Darlington (for CBE).

K Mydeen Esq Barrister.

4.2.2 Appendix 2

All England Law Reports/1964/Volume 1/Edwards v Skyways Ltd—[1964] 1 All ER 494; reproduced with permission Lexis Nexis (UK Law Reports)

[1964] 1 All ER 494

Edwards v Skyways Ltd

Queen’s Bench Division

Megaw J

15, 16, 17, 21 January 1964

Contract—Intention to create legal relationship—Agreement to make “ex gratia” payment—Oral negotiations on redundancy of employees—Employing company agreeing to make “ex gratia” payment to redundant employees—Consideration given by employees—Company subsequently rescinding agreement—Whether agreement legally binding. Contract—Uncertainty of terms—“Approximating to”—Whether agreement for payment of sum approximating to total of contributions to pension fund too vague.

The plaintiff was employed by the defendant company as an aircraft pilot, and as such he was a member of the defendant company’s contributory pension fund and entitled under its rules on leaving the defendant company’s service in advance of retirement age to a choice between two options, either to withdraw the sum of his own contributions to the fund or to take the right to a paid-up pension payable at retirement age. In January, 1962, the defendant company wrote the plaintiff, among others, informing him that it was necessary to declare a redundancy of approximately fifteen per cent of the defendant company’s pilot strength and giving him three months’ notice terminating his employment. At a meeting on 8 February 1962, between authorised representatives of the defendant company and Balpa, the plaintiff’s trade association, it was agreed (as recorded in the notes of the meeting) that “pilots declared redundant and leaving [the defendant company] would be given an ex gratia payment equivalent to the defendant company’s contributions to the pension fund”. The representative of the defendant company actually said at the meeting that the defendant company would make ex gratia payments “approximating to” the defendant company’s contributions. Having been informed of the recorded agreement, and having found other employment and left the defendant company’s employment at the end of March, 1962, the plaintiff elected on 1 May 1962, to withdraw his contributions to the pension fund and to receive the ex gratia payment that the defendant company proposed to make. The defendant company paid to the plaintiff the amount of his contributions, but did not make the ex gratia payment, and rescinded the decision to make ex gratia payments, having regard to the defendant company’s financial difficulties and creditors. The plaintiff brought this action to recover a sum equal to the total contributions made by the defendant company in respect of him to the pension fund. The defendant company contended that the recorded agreement was not intended to create legal relations and was too vague, and thus was not legally binding. It was admitted at the hearing that there was consideration moving from the plaintiff and that at the time of the meeting of 8 February 1962, the defendant company tended to carry out the recorded agreement.

Held—Where, as here, there was agreement and the subject of agreement related to business affairs, the onus of establishing that the agreement was not intended to create legal relations, which was on the perty setting up that defence, was a heavy onus (see p. 500, letter a, post); and the defendant company had failed to discharge it for the following reasons—

• (i) the words “ex gratia” were used simply to indicate that the party agreeing did not admit any pre-existing liability on the defendant company’s part, and the more use of the phrase “ex gratia” as part of a promise to pay (even if prompted by the purpose of avoiding the incidence of income tax) did not show that the promise, when accepted, should have no binding effect in law (see p. 500, letters d and f, and p. 501, letter d, post), and

• (ii) the use of the words “approximating to” on behalf of the defendant company did not render the terms of the agreement too vague to be enforceable, for at most the phrase would connote on the evidence a rounding off of a few pounds downwards to a round figure (see p. 501, letter f, post).

Observations of Scrutton LJ and Atkin LJ in Rose and Frank Co v J R Crompton & Bros Ltd. ([1924] All ER Rep at pp. 240, 252) considered.

Notes

As to the negativing of the intention of the parties to enter into legal relations, see 8 Halsbury’s Laws (3rd Edn) 54, para 90, note (a) and p. 69, para 118, note (h); as to uncertainty in the terms of an agreement, see ibid, pp. 83, 84, para 144; and for cases on the subject, see 12 Digest (Repl) 21–23, 3–12.

Cases referred to in judgment

Balfour v Balfour, [1918–19] All ER Rep 860, [1919] 2 KB 571, 88 LJKB 1054, 121 LT 346, 12 Digest (Repl) 21, 3.

Rose and Frank Co v Crompton (JR) & Bros Ltd [1924] All ER Rep 245, [1923] 2 KB 261, 92 LJKB 959, 129 LT 610, revsd HL, [1924] All ER Rep 245, [1925] AC 445, 94 LJKB 120, 132 LT 641, 12 Digest (Repl) 22, 4.

Action

In this action the plaintiff Peter John Edwards, an aircraft pilot, formerly employed by the defendant company, Skyways Ltd claimed payment of a sum equal to the total of the defendant company’s contributions on his behalf to the aircrew superannuation fund of which he had been a member. The action was founded on an oral agreement reached at a meeting on 8 February 1962, which had been arranged to negotiate matters arising out of a “redundancy declaration” affecting fifteen per cent of the defendant company’s pilot strength. At this meeting the defendant company through their representatives, acting on the authority of a resolution of the board of directors, promised the representatives of the British Air Line Pilots Association, acting for the plaintiff and other redundant pilots concerned, that to each of those pilots who left their service and opted to take a refund of his own contributions to the superannuation fund (rather than take the right to a paid-up pension payable on retirement age) they would make an ex gratia payment approximating to (or equivalent to) the contributions made to the fund by the defendant company in respect of that pilot. On 2 May 1962, the defendant company’s board of directors by resolution rescinded their earlier decision to make ex grattia payments to redundant aircrew. The facts appear in the judgment.

The cases noted below* were cited in argument in addition to those referred to in the judgment.

*Thomas v Brown, (1876), 1 QBD 714, Central London Property Trust v High Trees House Ltd, [1956] 1 All ER 256, n, [1947] 1 KB 130, Robertson v Minister of Pensions, [1948] 2 All ER 767, [1949] 1 KB 227, Combe v Combe, [1951] 1 All ER 767, [1951] 2 KB 215

[1964] 1 All ER 494 at 496

J P Comyn QC and J D F Moylan for the plaintiff.

A W Hamilton for the defendant company.

21 January 1964. The following judgment was delivered.

Megaw J

read the following judgment. The plaintiff, Captain Peter John Edwards, was employed as an aircraft pilot by the defendant company, Skyways from June, 1955, until 31 March 1962, with the rank of first officer for the first few months, and thereafter as captain. His terms of employment provided for three months’ notice of termination. On 26 January 1962, the defendant company, being in financial difficulty and not having sufficient work to continue to employ all its staff, wrote a letter to the plaintiff, at the same time sending similar letters to other persons. The plaintiff was told that it would be “necessary to declare a redundancy of approximately 15% of our pilot strength”, and he was given three months’ notice. He was offered alternative employment either as a captain based at Lympne Airport with a subsidiary company (which would have involved him in moving his home) or as a first officer on the defendant company’s four engined fleet (which would have involved reduction of pay and status).

The question of the threatened redundancy was taken up with the defendant company by the British Air Line Pilots Association, to which the plaintiff belonged. The association took the view that certain procedure which had been agreed in 1948 in the National Joint Council with regard to redundancies had not been observed by the defendant company. A meeting took place between representatives of the association and representatives of the defendant company on 8 February 1962. It is not in dispute that the representatives of the association were the duly authorised agents of the plaintiff, and that the representatives of the defendant company had full authority from that company in respect of all that was done and agreed at that meeting affecting the plaintiff. Two days before the meeting, on 6 February at a meeting of the board of directors of the defendant company, a resolution had been passed in these terms:

“The board approved that the secretary be empowered in his discussions with the British Air Line Pilots Association to agree should circumstances require to the payment to redundant aircrew members of ex gratia amount approximating to the company’s contributions for each member of the Pension and Superannuation Fund.”

It appears that the defendant company realised that the association would be seeking to secure some form of compensation for its members who were being declared redundant and that it was accordingly authorising the secretary, in advance, to deal with the question when it arose. The secretary of the defendant company, Mr David John Davies, himself drafted the resolution. It was based on what had been done at the time of an earlier redundancy in the defendant company in 1959, when, after discussions with the association, the defendant company had paid sums to redudant aircrew staff, the sums being at any rate closely related in amount to the total superannuation contributions made by the company in respect of the particular redundant employee.

At the meeting on 8 February 1962, the defendant company’s representatives included, amongst others, Mr Davies, the secretary, and Mr Lees, the personnel officer. The association’s representatives included, amongst others, Mr Follows, who was then the secretary, and Captain Clink, the chairman of the association’s local committee with the defendant company, who was also an employee of the defendant company. The plaintiff himself was not present. As to what happened at the meeting, so far as is relevant to the issues in this action, there is no real dispute on any matter of substance. Each of the witnesses who gave evidence before me was truthful and fair in giving his recollection. Such minor differences as there were in their accounts of the conversations are not on matters of any real significance. I need not recount much of what took place at the meeting. The substance of it is accurately summarised in a document headed “Notes”, which was prepared the next morning by Mr Follows with the assistance of Captain Clink, on the basis of manuscript notes made during the meeting. There is no doubt that everyone present at the meeting thought that all major difficulties had been resolved and that various matters of principle had been agreed. I need mention only one of the matters discussed and agreed.

The plaintiff (and there were other pilots in a similar position) would have been entitled under his terms of service, if he left his employment with the defendant company for any reason other than dismissal for misconduct, to take a paid-up pension; that is, a pension which would, without further contribution to be made by anyone, become payable when he reached the normal retiring age stated in the pension scheme. It would be calculated by reference to the total contributions paid, up to date, by himself and by the defendant company on his account. Alternatively, the plaintiff would be entitled to withdraw his own contributions in cash. Mr Follows had in mind what had happened in the 1959 redundancy when the company had agreed to pay, and had paid, redundant pilots sums of money equivalent, at least broadly, to the company’s pension contributions in respect of them, in addition to the pilots’ own contributions which they were contractually entitled to withdraw. He, therefore, at the meeting, asked that similar financial compensation should be paid by the defendant company, on this occasion. Mr Davies, on behalf of the defendant company, having already in anticipation received his board’s authority, quickly and readily agreed.

This agreement is recorded as follows in notes to which I have referred:

“The following general principles were then accepted in relation to the redundancy and consequential matters”;

and then, after certain other matters, this appears:

“Pilots declared redundant and leaving the company would be given an ex gratia payment equivalent to the company’s contribution to the Pension Fund. They would, of course, be entitled to a refund of their own contributions to the fund.”

The pilots affected were informed of the various decisions and agreements in a publication called “Newsletter”, addressed by the association to its members on 9 February 1962. The agreement as to the defendant company’s contributions is there recorded as follows:

“After considerable discussion, the following points were agreed between the company and the association: … 4. To those pilots who are finally declared redundant, the company will make an ex-gratia payment equivalent to their (the company’s) own contributions to the Provident or Pension Scheme.”

There is reason to believe that Mr Davies, the secretary, saw this “Newsletter”, and did not challenge the accuracy of what was there recorded. Mr Davies’ own account of what he said on the point at the meeting is as follows:

“Having the board’s authority, I said we would make ex gratia payments approximating to the company’s contributions for those pilots who chose to take their contributions rather than paid-up pension policies.”

I think it is probable that Mr Davies’s recollection is right when he says that he himself used the words “approximating to”. It may well be that both that phrase and “equivalent to” were used during the discussion. No one attached any particular significance to the point, and I do not regard verbal niceties as being of importance. Mr Davies in evidence agreed that “equivalent to” is a reasonable interpretation of what he said. Mr Lees agreed that everyone left the meeting with a clear impression that the defendant company would pay an amount equal to the defendant company’s contribution. I am satisfied that that is the substance of what was understood and agreed when the meeting ended.

The issue in this action is whether, as a result of what was agreed at the meeting, the plaintiff when he decided not to accept any of the offered alternatives but to leave the company’s service and withdraw his own pension contributions, acquired a legal right, to be paid by the defendant company a sum equal to the contributions which they had paid to the pension fund on his behalf. The plaintiff says that there was a legally binding contractual right. The defendant company say that, while there may have been a moral right, or an obligation binding in honour, there was not a legally enforceable right. Before considering the issue, I should complete my outline of the history of the matter.

The plaintiff, not desiring to accept the defendant company’s offer of continuing employment with the various disadvantages involved, sought and obtained other employment to begin on 1 April 1962, and the defendant company agreed that the plaintiff should leave their service on 31 March before the full three months’ notice had run. On 15 April 1962, the plaintiff wrote to Mr Roberts, the assistant secretary of the defendant company, asking for information to enable him to make up his mind about the option between, on the one hand, his undoubted legal right to take the paid-up pension, and, on the other hand, the right which it had been agreed (whether or not as an obligation binding in law) that he should have, to withdraw his own contributions and receive what he described (no doubt following the wording of the “Newsletter” which he had seen) as, “the amount of the ex gratia payment which the company proposes to make in the event of my taking the cash refund”. Mr Roberts replied on 17 April giving him approximate figures: a paid-up policy of about £180 per annum at the age of 50; his own contributions of approximately £630, less tax of approximately £60; and “The ex gratia payment will be approximately half as much again as your own contributions, but as this is purely ex gratia there is no question of tax.” The following day the plaintiff wrote to Mr Roberts telling him how he had decided to exercise what he believed to be his option: “I have decided to take the cash refund of my contributions, with the company’s ex gratia payment”. The plaintiff, with the complete frankness which was characteristic of his evidence, said that he could not now be sure whether he would have exercised the option the same way, if he had not though that the defendant company were going to pay him that which they had agreed to pay in respect of their own contributions. He would certainly have thought much more deeply about it. He might still have decided to take the immediate cash provided by the refund of his own contributions.

On 1 May 1962, the defendant company sent the plaintiff a cheque for £609 1s, in respect of his own contributions. On 2 May 1962, the very day after that payment had been made to, and accepted by, the plaintiff in the belief that a further sum was to follow—because the defendant company had so promised—the board of directors of the defendant company met and passed another resolution. It was in these terms:

“It was resolved that the company’s previous decision to make ex gratia payments to redundant aircrew be rescinded because of the large number of staff involved and in view of the position that the company’s contributions to the scheme which were returnable to the trustees could not, under the rules of the scheme, be utilised directly by the company. Mr Ryland and Mr Davies would draft a letter to the staff concerned explaining the position and Mr Davies would arrange with the insurance company for an extension of the option period to be made for all aircrew members who had already opted for cash so that they could reconsider their decision.”

I offer no comment, except to mention the explanation given on behalf of the defendant company. It is said that they found themselves in financial difficulties, with various creditors, secured and unsecured, pressing them. Although at the time when they made the promise they intended to honour it, later they thought that in the existing financial situation they should decline to honour it because they believed that it was not legally binding, and because other creditors, with legal obligations, might have been prejudiced. The defendant company have not gone into liquidation. The plaintiff has not been paid, because the obligation was merely, as I understood the defendant company’s view, a moral one, which they repudiated. It is not necessary for me to set out the subsequent history, since it does not affect the issue, namely: Was there a legal obligation on the part of the defendant company?

The defendant company admit, as I understand it, that at the meeting a promise was made on their behalf with their authority, although the actual word “promise” was not used. In the defence it was pleaded that no consideration moved from the plaintiff. That plea was expressly abandoned at the hearing. It was conceded that there was consideration. The defendant company admit that it was their intention to carry out their promise when they made it, and that the plaintiff’s representatives, and the plaintiff himself, believed, and acted in the belief, that the promise would be fulfilled. Everyone, at the end of the meeting, believed that there was an agreement which would be carried out. But the defendant company say that the promise and the agreement have no legal effect, because there was no intention to enter into relations in respect of the promised payment.

It is clear from such cases as Rose and Frank Co v J R Crompton & Bros, Ltd and Balfour v Balfour, that there are cases in which English law recognises that an agreement, in other respects duly made, does not give rise to legal rights, because the parties have not intended that their legal relations should be affected. Where the subject-matter of the agreement is some domestic or social relationship or transaction, as in Balfour v Balfour, the law will often deny legal consequences to the agreement, because of the very nature of the subject-matter. Where the subject-matter of the agreement is not domestic or social, but is related to business affairs, the parties may, be using clear words, show that their intention is to make the transaction binding in honour only, and not in law; and the courts will give effect to the expressed intention. Scrutton LJ expressed it thus, in Rose and Frank Co v J R Crompton & Bros Ltd ([1924] All ER Rep at pp. 249, 250; [1923] 2 KB at p. 288).

“It is quite possible for parties to come to an agreement by accepting a proposal with the result that the agreement concluded does not give rise to legal relations. The reason of this is that the parties do not intend that their agreement shall give rise to legal relations. This intention may be implied from the subject-matter of the agreement, but it may also be expressed by the parties. In social and family relations such an intention is readily implied, while in business matters the opposite result would ordinarily follow. But I can see no reason why, even in business matters, the parties should not intend to rely on each other’s good faith and honour, and to exclude all idea of settling disputes by any outside intervention with the accompanying necessity of expressing themselves so precisely that outsiders may have no difficulty in understanding what they mean. If they clearly express such an intention I can see no reason in public policy why effect should not be given to their intention.”

In the same case, Atkin LJ said ([1924] All ER Rep at p. 252; [1923] 2 KB at p. 293):

“To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly. Such an intention ordinarily wii be inferred when parties enter into an agreement which in other respects conforms to the rule of law as to the formation of contracts. It may be negatived impliedly by the nature of the agreed promise or promises, as in the case of offer and acceptance of hospitality, or of some agreements made in the course of family life between members of a family as in Balfour v. Balfour. If the intention may be negatived impliedly it may be negatived expressly.”

In the present case, the subject-matter of the agreement is business relations, not social or domestic matters. There was a meeting of minds—an intention to agree. There was, admittedly, consideration for the defendant company’s promise. I accept the propositions of counsel for the plaintiff that in a case of this nature the onus is on the party who assets that no legal effect was intended, and the onus in a heavy one. Counsel for the plaintiff also submitted, with the support of the well-known textbooks on the law of contract, (Anson, and Cheshire And Fifoot), that the test of intention to create or not to create legal relations is “objective”. I am not sure that I know what that means in this context. I do, however, think that there are grave difficulties in trying to apply a test as to the actual intention or understanding or knowledge of the parties; especially where the alleged agreement is arrived at between a limited liability company and a trade association; and especially where it is arrived at a meeting attended by five or six representatives on each side. Whose knowledge, understanding or intention is relevant? But if it be the “objective” test of the reasonable man, what background knowledge is to be imputed to the reasonable man, when the background knowledge of the 10 or 12 persons who took part in arriving at the decision no doubt varied greatly between one another? However that may be, the defendant company say, first, as I understand it, that the mere use of the phrase “ex gratia” by itself, as a part of the promise to pay, shows that the parties contemplated that the promise, when accepted, should have no binding force in law. They say, secondly, that even if their first proposition is not correct as a general proposition, nevertheless here there was certain background knowledge, present in the minds of everyone, which gave unambiguous significance to “ex gratia” as excluding legal relationship.

As to the first proposition, the words “ex gratia” do not, in my judgment, carry a necessary, or even a probable, implication that the agreement is to be without legal effect. It is, I think, common experience amongst practitioners of the law that litigation or threatened litigation is frequently compromised on the terms that one party shall make to the other a payment described in express terms as “ex gratia” or without admission of liability”. The two phrases are, I think, synonymous. No one would imagine that a settlement, so made, is unenforceable at law. The words “ex gratia” or “without admission of liability” are used simply to indicate-it may be as a matter of amour propre, or it may be to avoid a precedent in subsequent cases-that the party agreeing to pay does not admit any pre-existing liability on his part; but he is certainly not seeking to preclude the legal enforceability of the settlement itself by describing the contemplated payment as “ex gratia”. So here, there are obvious reasons why the phrase might have been used by the defendant company in just such a way. They might have desired to avoid conceding that any such payment was due under the employers’ contract of service. They might have wished-perhaps ironically in the event-to show, by using the phrase, their generosity in making a payment beyond what was required by the contract of service. I see nothing in the mere use of the words “ex gratia”, unless in the circumstances some very special meaning has to be given to them, to warrant the conclusion that this promise, duly made and accepted, for valid consideration, was not intended by the parties to be enforceable in law.

The defendant company’s second proposition seeks to show that in the circumstances here the words “ex gratia” had a special meaning. What is said is this: When a payment such as this is made by an employer to a dismissed employee the question whether it is subject to income tax in the hands of the recipient is important; it was understood by the defendant company and by the association, and by all their respective representatives at the meeting, that if the company’s payment were made as the result of a legally binding obligation, it would be taxable in the hands of the recipient; whereas, if it were to be made without legal obligation on the part of the company, it would not be taxable. (It was not argued before me whether this assertion is right or wrong in law. It was said by the defendant company that that was quite immaterial; what was material was that the parties so believed.) Thus, it is said, the phrase “ex gratia” was used, and was understood by all present to be used, deliberately and advisedly as a formula to achieve that there would be no binding legal obligation on the company to pay, and hence to save the recipient from a tax liability. It is said that the offer was accepted by the association with full knowledge and understanding of these matters. Hence, it is said, the agreement by tacit consent, a consent evidenced by the use of the words “ex gratia” against this background of common understanding, was an agreement from which legal sanction and consequences were excluded. In my judgment, that submission also fails because the evidence falls far short of showing that this supposed background of avoidance of tax liability was present as an important element in the minds of all, or indeed any, of the persons who attended the meeting of 8 February 1962, or, if this be something different, in the minds of the defendant company or of the association; or that they all, or any of them, directed their minds to the significance of the words “ex gratia” which is now suggested on behalf of the defendant company. The question of tax liability, and the possible influence thereon of the use of the words “ex gratia”, may indeed have been present in some degree, and as one element, in the minds of some of the persons present at the meeting. That, however, is far from sufficient to establish that the parties—both of them—affirmatively intended not to enter into legal relations in respect of the defendant company’s promise to pay.

Lastly, the defendant company say that, even if the agreement were otherwise in all respects a binding agreement, it is not enforceable because its terms are too vague. This is founded on the submission that the precise words used by Mr Davies at the meeting were “approximating to”; that these precise words are a part of the agreement; that they leave a discretion to the defendant company; that therefore there is no enforceable agreement, and they can refuse to pay anything. I have already indicated my conclusion on the evidence as to what was indeed agreed at the end of the meeting. If this be right, there is nothing in this point. Even if it were wrong, I do not think that English law provides that in such circumstances the plaintiff would be entitled to nothing. At most “approximating to”, if that were the contractual terms, would on the evidence connote a rounding off of a few pounds downwards to a round figure. If a contract for the sale of goods is valid and binding when it provides for “about 1,000 tons in seller’s option”, or “1,000 tons, up to ten per cent more or less in buyer’s option”, it would seem hard to justify treating such a contract as this as a nullity, and I do not think that the law so requires.

I do not have to consider a further issue of alleged failure to mitigate damages, as this was expressly abandoned by the defendant company at the hearing. I shall hear submissions as to the precise form which the order of the court should take.

Judgment for the plaintiff.

Solicitors: Evan Davies & Co (for the plaintiff); McKenna & Co (for the defendant company).

K Diana Phillips Barrister.

Encyclopaedia of Forms and Precedents/BOILERPLATE AND COMMERCIAL CLAUSES vol 4(3) 2008/(B) Commentary/D: WHICH CONTRACT TERMS APPLY?/25: SUBJECT TO CONTRACT (AND OTHER DENIALS OF LEGALLY-BINDING CONTRACT)/25.2 Heads of agreement

25.2 Heads of agreement

The phrase ‘subject to contract’ is also sometimes found in heads of agreement and other preliminary documents which are designed to summarise the main commercial terms of a proposed contract. This type of document is often called either:

• (a) Heads of Agreement; or

• (b) Heads of Terms; or

• (c) Term Sheet; or

• (d) Letter of Intent; or

• (e) Comfort Letter; or

• (f) Memorandum of Understanding

Documents of this kind do not have any automatic legal status. They may or may not be intended to be legally binding. Rather than just insert the words ‘subject to contract’ at the head of the document, it may be preferable to state more specifically what the status of the document is, as in the example below.

Where the transaction is wholly within England and Wales (with English parties, performance to take place in England and Wales, etc.), some of the provisions in the example below may be thought unnecessary. In international contracts it should be borne in mind that local laws may provide that a party is liable if it withdraws from negotiations without good reason after a defined stage, e.g. after Heads of Terms have been signed.

The following example states that the Heads of Terms are not legally binding except for paragraph X. The parties might wish, for example, a confidentiality provision or a lock-out clause to be binding but the rest of the Heads to be non-binding.

‘These Heads of Terms set out the main commercial principles of a proposed agreement between (parties) (‘the Parties’) relating to (subject matter). The Parties intend to negotiate and (subject to obtaining approval from their respective Boards of the negotiated terms) execute a full written agreement (‘the Agreement’), no later than [90] days from the date on which they sign these Heads of Terms. The parties intend that the Agreement will include provisions based on the principles of these Heads of Terms and other provisions. However, [except for paragraph X below,] these Heads of Terms are not intended to be legally binding, nor to create, evidence or imply any contract, obligation to enter into a contract or obligation to negotiate. Either party may withdraw from the negotiations without incurring any liability to the other party, at any time prior to the execution by both parties of the Agreement.

Encyclopaedia of Forms and Precedents/BOILERPLATE AND COMMERCIAL CLAUSES vol 4(3) 2008/(C) Forms and Precedents/H: ANCILLARY AGREEMENTS/71.3 Letter of intent: simple form

4.2.3 Appendix 3

71.3 Letter of intent: simple form ⁵

(date)

(address)

Dear Sirs,

Letter of Intent

I refer to the discussions which have been taking place between (name) of (name of company) (‘Company A’) and (name) of (name of company) (‘Company B’) relating to a proposed strategic alliance between Company A and Company B, and in particular to the document entitled (title) and dated (date) and prepared by (name) (the ‘Proposal’).

I am pleased to confirm that it is our intention to negotiate the terms of an agreement between Company A and Company B under which, among other matters:

• 1 Company A would sponsor a [three year] programme of research to be conducted by Company B as outlined in the Proposal [and based on the costs set out in the Proposal]; and

• 2 Company A would own, and have the exclusive right of commercialisation of, any compounds discovered or developed in the programme of research [on terms to be agreed].

It is our intention to negotiate and execute such an agreement no later than (number) months from the date of this letter. If this is also Company B’s intention, please would you arrange for the enclosed copy of this letter to be signed by an authorised representative of Company B and returned to us at the above address.

I hope this letter gives you the assurances you need, but please note that this letter should not be construed as creating any legal obligations.

Yours faithfully

(signature)

For and on behalf of Company A Limited

Acknowledged and agreed for and on behalf of Company B through its authorised signatory:

(signature)

Encyclopaedia of Forms and Precedents/BOILERPLATE AND COMMERCIAL CLAUSES vol 4(3) 2008/(C) Forms and Precedents/H: ANCILLARY AGREEMENTS/71.4 Letter of intent: longer form

4.2.4 Appendix 4

71.4⁶ Letter of intent: longer form

Subject To Contract

(date)

From:

To:

Dear (name)

Re: (specify)

This ‘Letter of Intent’ for the above referenced matter is intended to outline the general terms which are being discussed between (name of company) (‘Company A’) and (name of company) (‘Company B’) in relation to those services which are attached hereto as Tables 1 and 2. [These tables are extracted from the (name) Plan Proposal for (insert details) which was presented to Company B in (insert details)]. At the present time, Company A and Company B are engaged in discussions and negotiations regarding timelines, budget, management services and contract terms, Company A’s initial proposal for which was contained in the aforementioned development plan, with a view to reaching a final agreement between the parties.

It is agreed that the confidentiality of Company B proprietary information regarding the above referenced matter that may be disclosed to Company A during these negotiations will be maintained in accordance with the confidentiality agreement signed between Company B and Company A and subsequently in accordance with the master study agreement when signed. Should Company B and Company A not reach an agreement the documents will be returned and the terms of the aforementioned confidentiality agreement will be honoured. Notwithstanding this confidentiality as part of this letter of intent, the proposed agreement between the parties will contain a detailed section addressing this subject which will include a provision that the ownership of the data generated in this study will remain with Company B.

Company B and Company A will continue discussions and negotiations in good faith to execute an agreement within [90 days] of the execution of this letter of intent. [Company B and Company A recognise that this letter of intent is necessary to expedite this matter due to the desired project timelines. Company B and Company A agree and recognise that a signed agreement is necessary to proceed with the study beyond the initial [90-day] period set forth above.]

Upon execution of this letter of intent, Company B will advance money to Company A in the amount of £… [(plus VAT)² ] on account of any and all charges Company A shall reasonably determine appropriate and necessary, in consultation with Company B [and in accordance with the schedule of activities (Table 3) attached to this letter], in providing the aforementioned services. Payment of this money shall be made to Company A’s bank account at (insert details). Such amounts shall be applied and deducted from any amount due from the initial payment under the proposed agreement between Company B and Company A regarding this study. Should a final agreement not be reached, any balance remaining in this account will be refunded to Company B (plus any VAT paid thereon)³ minus expenses properly incurred and committed but not yet paid and less a £… administrative fee. Company B shall have the option to audit the charge and expense documentation at any time following the execution of this letter of intent and up to [3 years] following the completion of this engagement.

In case of early cancellation of the work covered by this letter of intent by written notice from Company B, the provisions of the previous

• 1 Company B shall indemnify Company A and its directors, officers, employees and agents in respect of all liabilities, costs, claims, loss, damage, demands, actions and expenses (to include any settlements or ex-gratia payments and reasonable legal and expert costs and expenses) arising directly or indirectly from any:

  • 1.1 material breach of any of the provisions contained in this letter of intent; or

  • 1.2 negligence; or

  • 1.3 material act, omission or default however caused on the part of company B or its directors, officers, employees, agents and representatives.

• 2 Company A shall indemnify Company B and its directors, officers, employees and agents in respect of all liabilities, costs, claims, loss, damage, demands, actions and expenses (to include any settlements or ex-gratia payments and reasonable legal and expert costs and expenses) arising directly or indirectly from any:

  • 2.1 material breach of any of the provisions contained in this letter of intent; or

  • 2.2 negligence; or

  • 2.3 material act, omission or default however caused

paragraph shall be deemed terminated.

During the term of this letter of intent relating to the Project Proposal:

on the part of Company A, or its directors, officers, employees, agents and representatives.

We thank you for the confidence you have placed in Company A and we look forward to working with you. Except as provided above, Company B shall not have any financial obligations to Company A or any third party under or in connection with this letter of intent. Either party may terminate this letter of intent and/or their negotiations at any time without liability except as described under heads 1 and 2 above.

IN WITNESS of which the parties to this letter of intent have signed below through their authorised representatives.

• 1 This is an example of a letter of intent in which some terms are binding, and some of the envisaged services are to be provided while negotiations are continuing and before a final binding agreement is made.

• 2 Where an advance payment is made it will normally create a tax point for VAT purposes where it is envisaged that the advance will form part of the total payment: see Customs and Excise Comrs v Richmond Theatre Management Ltd [1995] STC 257.

• 3 Where VAT has been paid on the advance and repayment is due, an amount equal to the VAT charged must be repaid to Company B and a VAT credit note should be issued to Company B. The amount of the VAT credited should not be reduced by virtue of the expenses or administration fee deducted from the advance.

4.2.5 Appendix 5

Letter of Intent—Sponsorship ⁷

[To Be Typed on Headed Notepaper of the Company]

Dear Sirs,

Proposed sponsorship —[ ] (“the Tournament”)

This letter sets out on the basis referred to at clause 10 the principal terms upon which [ ] (“the Company”) makes its offer to [ ] (“you”/“your”/“yourself” and corporate expressions) in relation to your proposed sponsorship of the Tournament.

• 1. Consideration

  • 1.1 We propose to offer you the various sponsorship rights set out in clause 2 of this letter (“the Rights”) in relation to your proposed sponsorship of the Tournament due to take place during the period commencing on [ ] and concluding on [ ] (“the Term”) for a fee of [ ] (“the Fees”) exclusive of VAT which will be paid as follows:

    Payment Date Amount

• 2. Rights

  During each season of the Term, subject to payment of the Fees, the Company is prepared to offer the sponsorship and ancillary rights in relation to the Tournament set out below.

  • 2.1 Designations

    • 2.1.1 The exclusive right for you to describe yourself as “Official Sponsor of the Tournament;

    • 2.1.2 The non-exclusive right for you to describe yourself as “Official Partner of the Company”; and such other designations as may be agreed;

    • 2.1.3 The exclusive right for you to describe the [service/product] (“the Product”) the “Official [Service/Product] of the Tournament” and/or the “Official [Service/Product] of the Company;

    • 2.1.4 The exclusive right for you to describe yourself as the “Official Supplier of [Service/Product] to the Tournament and/or the “Official Supplier of [Services/Product] to the Company”

  • 2.2 Use of Marks

    • 2.2.1 The non-exclusive right to use (subject in each case to the Company’s prior written approval and terms of use) those logos and trade marks owned or controlled by the Company set out at Schedule 1 hereof in relation to all promotional activity undertaken by you in relation to the promotion of the Product only and your exploitation of the Rights.

  • 2.3 Advertising Rights

    • 2.3.1 You will receive the following advertising rights in respect of matches taking place as part of the Tournament only (“Matches”)

      • 2.3.1.1 the right to display the trade mark(s) or logos of or relating to the Products referred to at Schedule 2 (“the Marks”) upon six (6) (90 cm × 6 m) TV perimeter advertising sites at each Match;

      • 2.3.1.2 one (1) full page colour programme advertisement for all Matches.

  • 2.4 Tickets

    • 2.4.1 You have the right to receive the following ticket allocations:

      • 2.4.1.1 fifty (50) best available category match tickets at no extra cost for each Match;

      • 2.4.1.2 the right to purchase a reasonable number of additional match tickets (subject to availability and at your additional cost) for all Matches

        in each case subject always to any and all conditions of issue and ground regulations applicable to the same from time to time in force.

  • 2.5 Hospitality

    • 2.5.1 (Subject to availability and in each case subject always to any and all conditions of issue and ground regulations applicable to the same from time to time in force) the right to use hospitality facilities at each Match for a maximum number of people as follows:

      • 2.5.1.1 [ ]

  • 2.6 Branding

    • 2.6.1 The non exclusive right to receive branding by way of the display of the Marks as follows:

      • 2.6.1.1 on a total proportion not greater than [ ]% and not less than [ ] of the total visible surface area (evenly distributed with any other marks displayed there) of interview backdrops produced by or on behalf of the Company at all Matches;

      • 2.6.1.2 on all official promotional print activity of the Company in respect of the Tournament; and

      • 2.6.1.3 on all tickets for the Matches.The Company agrees not more than [ ] further trade marks or logos of other partners or sponsors of the Tournament and/or the Company shall be displayed alongside the Marks as referred to above and that the Marks shall be displayed in such manner as in the reasonable opinion of the Company accord with your premier stations as the exclusive sponsor of the Tournament.

  • 2.7 Additional Rights

    • 2.7.1 You will also receive the following rights:

      • 2.7.1.1 the right to place approved amounts of agreed content in respect of the Products on the official website of the Company;

      • 2.7.1.2 agreed branding by way of display of the Marks on the official website of the Company;

      • 2.7.1.3 an “above the fold” hypertext link from your website situated at [insert details] to the official website of the Company;

      • 2.7.1.4 the right to a press conference announcing your sponsorship of the Tournament at a time and location to be mutually agreed;

      • 2.7.1.5 tannoy announcements in a form to be agreed to be made as agreed at each Match;

      • 2.7.1.6 (subject to available space at venues hosting matches and to applicable regulations and to agreement as to the manner in which the same is to take place in each instance) the right to sample and promote the Products at venues hosting each Match;

      • 2.7.1.7 where a giant television screen is placed at venues hosting the Matches the right to agreed advertising and branding opportunities in respect of the Products on such screen; and

      • 2.7.1.8 such additional rights as the Company may make available at its discretion and on such terms as may be agreed from time to time.

• 3. Condition

  • 3.1 This offer is subject to the negotiation and entry into a full long form sponsorship agreement (“the Sponsorship”) drafted by the Company in a form satisfactory to all parties containing warranties, indemnities and covenants (and reasonable limitations) appropriate to an arrangement of this nature together with all appropriate third party guarantees of your liabilities pursuant to the Sponsorship.

• 4. Timing

  • 4.1 It is our intention to proceed as quickly as possible with the proposed sponsorship and we aim to sign this letter on or before [ ] and to complete the proposed transaction by [ ] (or as soon as reasonably practicable thereafter).

• 5. Other Partners

  • 5.1 The Company agrees that it shall not during the Term grant to any person:

    • 5.1.1 the rights referred to at clauses 2.1.1, 2.1.3 and 2.1.4; and/or

    • 5.1.2 any right to display any signage referring to that person at any venue hosting any Match during the course of any Match where such rights are to be used by that person in the advertising promotion or marketing of [any product/service defined in the Sponsorship as being competitive with the Products]

  • 5.2 Save as set out expressly in this clause 5 the Company shall be entitled freely to grant such rights in connection with the Tournament as it sees fit to such persons as it sees fit without restriction and nothing herein shall have the effect of placing any constraint on the rights of participants in the Tournament from granting any rights in respect of advertising marketing promotional or sponsorship rights or services to any person provided the same is in accordance with the rules of the Tournament a copy of which has been provided to you.

• 6. Television

  • 6.1 As part of the Sponsorship there will be terms dealing with the anticipated level of television exposure for matches forming part of the Tournament and, in particular, the Company acknowledges that it has agreements in place with broadcasters in respect of the territories where matches forming part of the Tournament take place.

• 7. Confidentiality

  • 7.1 In consideration of the mutual agreement of the parties to the proposed transaction, by countersigning and returning the enclosed copies of this letter, it is agreed that neither party or any of their respective directors, officers, employees or professional advisers shall disclose the contents of this letter or any discussions between the Company and you (and for the fact that this letter or such discussions have taken or are taking place) to any third party apart from their own professional advisers who will be under the same obligation to keep all aspects of the proposed transaction confidential or as required by law or the provisions of any relevant stock exchange.

• 8. Exclusivity

  • 8.1 The Company understands that you will incur substantial costs and expenses in proceeding with due diligence investigations and instructing advisers to draft and negotiate documents, which it would not do if it did not have exclusive negotiating rights for a reasonable period of time. Accordingly, in consideration for such costs and expenses to be incurred by you, the Company agrees by countersignature of this letter:

    • 8.1.1 not to enter into, directly or indirectly, or continue discussions or negotiations or enter into any agreement or arrangement with any person other than you regarding the grant of the rights referred to at clause 2.1.1 and not to invite or solicit any such discussions agreement or arrangement;

    • 8.1.2 not to withdraw from negotiations with you in respect of the subject matter of this letter save where the Company has proper commercial reason for so doing. For the purpose of clarification an without prejudice to the generality of the foregoing the Company shall be deemed to have proper commercial reasons where you have indicated that any of the terms set out herein is no longer acceptable to you or have sought materially to add to the rights to be granted to you pursuant to the Sponsorship over and above the terms referred to herein or by way of substitution for terms set out herein; in each case for a period of [              days] from the date of this letter (“the Exclusivity Period”) unless the Company and you agree in writing to the contrary. The Company agrees to supply to you such information as it reasonable requests in connection with the subject matter of this letter.

• 9. Costs

  • 9.1 Subject to paragraph 9.2, each party will pay the costs and expenses incurred by it in connection with the negotiation, entering into and completion of this letter and the Sponsorship and any allied documentation.

  • 9.2 If the Company breaches any of its obligations in this letter, or if during the Exclusivity Period the Company withdraws from the negotiations with you provided for herein, then the Company will pay to you promptly on demand an amount equal to all costs and expenses (including, but not limited to, the fees of your legal, accounting and financial advisers and their out-of-pocket expenses) together with any value added tax incurred by you whether before or after the date of this letter in investigating the affairs of the Company and in the preparation of this letter and the Sponsorship and any other allied documents.]

• 10. Status of this Letter

  • 10.1 Save for clauses 7, 8 and 9 which are intended to and shall create a binding legal agreement upon the terms set out therein governed by the laws of England and Wales (and in respect of which the Courts of England shall have exclusive jurisdiction) the provisions of this letter are not intended to be binding in law and are not intended to nor shall create any binding contractual obligation between the Company and you upon the terms here set out or otherwise nor any representation by either party upon which the other is entitled to rely.

The Company very much looks forward to progressing negotiations with you as quickly as possible, and would be grateful if you could sign and return the enclosed copy of this letter to indicate your agreement with its terms.

Yours faithfully

………………………………….

For and on behalf of

Read and agreed.………………………………….

For and on behalf of