20 Sep 2018

Despite best intentions, parties sometimes end up in a commercial relationship without any written contract, due perhaps to:

  • an administrative error; or 
  • the need to commence the job as quickly as possible, leaving the completion of a written contract, seen as a formality, for a later date. 

In that situation, if one party fails to perform its part of the agreement, can the aggrieved party recover any losses it suffers? The answer is – potentially. 

There have been a number of cases in the Courts recently which have looked at this question in some detail. These cases have considered two ways in which an aggrieved party might be able to establish that the non-performing party has legal liability for the aggrieved party's loss. Either the aggrieved party must:

  • prove breach of an oral contract by establishing:
    • that there is an oral contract between the parties; 
    • the terms of that oral contract; and 
    • that there has been a breach of those terms; or
  • show that the non-performing party owed the aggrieved party a duty of care in tort, and breached that duty of care. 

If the basis of the aggrieved party's claim could be under either contract or tort, that party should consider how damages are measured for the two types of claim, as the level of compensation could hinge on that decision. Damages in tort are awarded by aiming to restore the successful claimant to his/her position had the tort not been committed, whereas damages in contract aim to put the innocent party into the position s/he would have been in had the contract been performed. Although subtle, the difference in emphasis can result in significant differences in the level of damages awarded. 

Oral contracts

Despite Samuel Goldwyn's famous maxim that a verbal contract "isn't worth the paper it's written on", an oral agreement can in fact be very useful for an aggrieved party, if they can establish a contract's basic elements of offer, acceptance, intention to create legal relations and consideration. The precise terms of that contract, and breaches of those terms, are determined on the facts. 

Duty of care in tort

A duty of care in the tort of negligence can be proven by satisfying one of two separate, but parallel, tests:

  • the "threefold" test (whether (i) the particular loss was reasonably foreseeable; (ii) there was a sufficient relationship of proximity between the parties; and (iii) it is fair, just and reasonable in the circumstances to impose the duty); and
  • the "assumption of responsibility" test (whether the non-performing party has undertaken a responsibility towards the aggrieved party to exercise reasonable skill and care). 

If the above tests cannot be satisfied, it is possible to invoke the "incremental" approach. In short, this is where the Courts decide there is a duty of care by analogy to previous cases which found there was a duty. 

If a party owes a duty of care, then it must exercise reasonable skill and care in the exercise of that duty. If the aggrieved party can establish that it did not, then the aggrieved party will in principle have a claim.  

Recent examples in practice 

Three recent examples that came before the Courts are:

  • Dacy Building Services v IDM Properties [2018] EWHC 178 (TCC); 
  • Burgess & Anor v Lejonvarn [2016] EWHC 40 (TCC); and
  • BDW Trading Ltd v Integral Geotechnique (Wales) Ltd [2018] EWHC 1915 (TCC).

Oral contracts - Dacy Building Services v IDM Properties

HOC (UK) Limited (HOC) contracted with IDM Properties LLP (IDM) to develop some London residential and retail space. Following financial problems, HOC asked Dacy Building Services Ltd (Dacy) to complete their work, resulting in a planning meeting between HOC, IDM and Dacy. In that meeting, Dacy made it clear they would contract with only IDM and not HOC, as a result of past experiences with HOC. However, no written contract was entered into with Dacy, although some details were discussed such as the payment scheme. 

Dacy then proceeded to carry out its services. Payment to Dacy was administered through HOC, but was ultimately paid by IDM. HOC would approve Dacy's payment applications and pass them to IDM to be certified and paid. Following three successful payment applications, the fourth and fifth were not paid and Dacy claimed an undisputed sum of £247,250 plus interest from IDM under contract. 

At trial, IDM argued that:

  • they were not liable for Dacy's unpaid invoice, because IDM had no contract with Dacy; and
  • if there was a contract, it was between Dacy and HOC. 

However, the Court decided that:

  • there was an oral contract between Dacy and IDM because: 
    • witness and documentary evidence showed that there had been an offer, acceptance and intention to create legal relations in the meeting between all parties; 
    • Dacy had provided consideration in the form of work already undertaken on site; and 
    • the payment arrangements (IDM's consideration) were consistent with Dacy intending to create legal relations with IDM.
  • there was no contract between Dacy and HOC, mainly because Dacy had made their intention not to contract with HOC clear.

This left IDM liable to Dacy for the disputed sum.  

Duty of care in tort - Burgess & Anor v Lejonvarn

An architect friend of Mr and Mrs Burgess agreed to provide them with free architectural services, without any contract. The project failed, resulting in the Burgesses successfully claiming £265,000 from the architect for economic loss. They were successful in their claim, despite the lack of a contract, because they established that the architect owed them a duty to exercise reasonable skill and care in tort. They key reasons given by the Court were:

  • the loss suffered by the Burgesses was foreseeable, there was sufficient relationship of proximity and, because the Burgesses were carrying out work on their private property, it was fair, just and reasonable to impose a duty of care on the architect; 
  • due to the architect's professional background, it was reasonable that the Burgesses would have relied upon the architect to work to a proficient standard; and
  • the architect had established that her relationship was between her and her "clients", for instance by naming the Burgesses as such on her design drawings, suggesting an assumption of responsibility.

The judge further ruled that where a contractor tenders services where s/he knows or ought to know that the other party will rely on the services, duty of care will always be established. 

We have discussed this case in more detail here.

When you do need a written contract - BDW Trading Ltd v Integral Geotechnique (Wales) Ltd

In June 2012, Barratt Homes and David Wilson Homes (BDW), received a tender package for a site that they intended to buy from a local council. This tender package included a site geotechnical package (the Package), prepared by Integral Geotechnique (Wales) Limited (IGL). 

When originally instructing IGL to generate the Package, the local council had requested that it be capable of assignment with warranties to the eventual site purchaser. 

Upon purchase in May 2014, BDW was forced to carry out costly site decontamination works due to asbestos presence. Because BDW had no contractual relationship with IGL, BDW pursued a tortious claim against them for failure to identify the site's asbestos problem within the Package. 

BDW's claim failed because:

  • the relationship between BDW and IGL did not pass the "threefold" test under tort, because there was not sufficient proximity of relationship; and
  • the case would also not have passed the "assumption of responsibility" test as:
    • BDW erroneously failed to secure assignment of the Package, as was their option; 
    • the Package stated that it was for the local council's use only, unless IGL provided consent (which was not pursued by BDW); and 
    • IGL's appointment expressly excluded third party rights.

Had BDW simply requested a formal assignment of the benefit of the Package to it from the Council, then it would have had a simple contractual claim. This case is therefore a good example of when you do need a written contract. 

The judge confirmed that this case's facts were "very different" from the Burgess Case, as it was not clear that BDW were relying on the Package's contents. 

Lessons learned

The key lesson from these three cases is that Samuel Goldwyn was partly right – a written contract is always better than an oral contract or reliance on negligence in tort. That is simply because there is then very likely to be a clear and unarguable relationship between the parties even if the details of that relationship may still be a source of dispute. 

However, if you find yourself in a position where you don't have a written contract then all is not lost – there may still be a way to pursue a claim if you can establish the necessary facts.