British Steel Corp v Cleveland Bridge and Engineering Co Ltd
Citations:  1 All ER 504.
The parties were negotiating for the manufacture of steel work which the defendant needed for their construction project. The claimant gave the defendant an estimated price early in the negotiations. They based this price on incomplete information, and informed the defendant that the parties would need to agree a final rate.
The parties continued to discuss their technical requirements. On the 21st of February, the defendant sent the claimant a letter of intent stating that they were willing to contract based on the estimated price. The letter proposed that the contract be based on the defendant’s standard terms. These standard terms included a term imposing unlimited liability on the claimants for late delivery. It also requested that the claimants begin work immediately, ‘pending the preparation and issuing to you of the official form of sub-contract.’ The claimant did not respond to the letter, expecting a formal order to follow. However, they did begin work.
The defendant then indicated that they wanted the products to be delivered in a particular order. The parties re-entered negotiations over the proper specification of these products but did not reach a final agreement. When the claimant sent the defendant the first delivery, the defendant found the castings unsatisfactory and changed the specifications again.
The claimant then sent the defendant a formal quotation for the price. This was significantly higher than the initial estimate. The defendant rejected the quotation and changed the specifications again. The claimant continued manufacturing. Eventually, the parties agreed on the price but could not agree on other matters such as liability for late delivery. Months later, almost all of the products had been delivered. However, an industrial dispute delayed the final delivery.
The claimant sued the defendant for the value of the work in quantum meruit, on the grounds that a contract had never formed between the parties. They contended that they would have never agreed to the defendant’s standard terms. The defendant argued that there was a contract, and counter-claimed for breach. They claimed the claimant breached the contract by delivering the final instalment late and in the wrong order.
- Had a contract formed between the parties?
The court held that no contract had formed between the parties. The claimant had not accepted the letter of intent by starting production. This was because the parties were still negotiating and had yet to agree on critical terms such as the price and delivery dates. Additionally, both parties always expected a formal contract to follow, though it never manifested.
Since the parties ultimately never agreed on the key contract terms, the work performed was not referable to any contract. The claimant was therefore entitled to quantum meruit. The defendant’s counterclaim failed.
This Case is Authority For…
A letter of intent can give rise to a binding agreement, but this depends on the circumstances of the case. A contract arising from a letter of intent can take one of two forms:
- A normal executory contract, in which the letter is an offer which the other party accepts in the traditional way;
- An ‘if’ contract. This is a contract where the offeror asks the offeree to carry out certain performance, promising that if the offeree does so, the offeror will carry out certain performance (such as payment) in return.
An ‘if’ contract (also known as a unilateral offer) is ‘no more than a standing offer
which, if acted on before it lapses or is lawfully withdrawn, will result in a binding contract.’
In this case, the letter of intent asked for the claimant to do certain performance. However, it stated that this performance was pending a formal contract which had not yet actually been agreed. It was therefore not an ‘if’ contract. By performing, it was not possible for the claimant to accept the terms of a contract which were at that time unknown (and never manifested).
Since there was no contract, the claimant was never bound to complete the work, complete it by a particular date, or in a particular order. Godd J noted that even if the letter of intent had been a unilateral offer, it would not oblige the claimant to continue with or complete the work. The defendant’s counterclaim was therefore bound to fail in any case.