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In it for the long term - contractual negotiations

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In the case of Whittle Movers Limited v Hollywood Express Limited [2009] EWCA Civ 1189 the Court of Appeal has recently considered the common scenario in which a party commences performance of services whilst terms are under negotiation, in contemplation of the signing of a formal written long term contract.  The case highlights that if parties have entered into negotiations "subject to contract" a binding contract will only be implied in exceptional circumstances. 

Hollywood provided distribution services for its parent company, the well known cinema group UCI, and put the services out to tender - Whittle was the successful candidate.  Subsequent negotiations were entered into "subject to contract" and a letter of intent was signed.  Following this, Whittle began to carry out distribution services while important terms were still being discussed in contemplation of a six year contract. 

Hollywood paid Whittle for work carried out over a 15 month period at a rate consistent with the long term contract proposed, but subsequently gave notice to terminate the agreement.  Whittle argued that by conduct the parties had entered into the long term contract.  Hollywood argued instead that the conduct of the parties had resulted in the formation of an interim contract terminable on six months' notice. 

The Court's Initial Decision: interim contract - price by reference to contractual negotiations

The High Court Judge, His Honour Judge Raynor QC found that there was no long term contract but that there was an interim contract terminable on 6 months' notice.  By Judge Raynor's reasoning, Whittle was entitled to be paid for services provided and the price for those services was to be fixed pursuant to that negotiated between the parties.  Those were prices set by reference to, and arguably appropriate only to a long term contract.

Court of Appeal Decision: no contract - possibility of unjust enrichment

The Court did not agree with Judge Raynor's reasoning that there was no long term contract but merely an interim contract.  It instead substituted a decision that no contract at all had come into existence between the parties, chiefly because important terms were still under negotiation.

It was held that whilst parties continue to negotiate a contract which envisages future obligations it is highly unlikely that they will in the interim conclude a contract containing the terms they are still negotiating.  It is more likely that they will have entered into an "if" contract, that is to say a contract whereupon if one party supplies services, the other will be obliged to pay reasonable remuneration.  Where important terms are still being negotiated, even an "if" contract will not have been entered into and consequently the proper answer is that there is no contract.  A "restitutionary" remedy may be available to the extent that one party has been "unjustly enriched". 

In light of this, it was arguable that Hollywood had been unjustly enriched by paying Whittle for services at a lower price suited only to a long term agreement.  The Court of Appeal therefore ordered an inquiry as to whether Hollywood had in fact been unjustly enriched, opening the door to compensation for Whittle.

Summary

Even where parties are operating on the basis that a long term contract will eventually be fully negotiated and signed, an interim contract may not have come into existence.  The Court may however intervene to prevent the unjust enrichment of one party.  This emphasises the importance of seeking legal advice at the outset of commercial negotiations so that clear and satisfactory arrangements can be put into place in the interim as well as in the long term.

If you would like any advice regarding commercial negotiations, the formation of contracts or remedies when an agreement has broken down, please contact John Mackle - a member of our Commercial Litigation Department on 0113 336 3336 or at j.mackle@clarionsolicitors.com 

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