Merit Process Engineering Ltd v Balfour Beatty Engineering Services (HY) Ltd

A binding construction contract may arise before formal documents are signed, but an unresolved term will prevent contract formation where it is important and no objective machinery exists to determine it. Contract price is ordinarily an essential term in a substantial commercial contract, particularly where it depends on further negotiation rather than independent assessment. A letter of intent may govern the parties’ relationship until formal terms are agreed, including an agreed entitlement to reimbursement of specified costs. By contrast, acceptance by conduct of identified contractual documents may establish a subcontract containing an arbitration clause. Under section 9 of the Arbitration Act 1996, proceedings concerning such a contract must be stayed.

The claimant sought damages arising from three work packages undertaken for the defendant: the Main Installation package, the Vacuum Drainage package and the Isis package. The defendant applied under CPR 62.3(2) and section 9 of the Arbitration Act 1996 for stays on the basis that the relevant subcontracts contained arbitration clauses.

The claimant accepted that the Isis package was subject to a valid arbitration clause. The central dispute concerned whether a binding subcontract had been concluded for the Main Installation package, where the parties remained divided over the contract price and the application of a main contractor’s discount. The court also considered whether a subcontract for the Vacuum Drainage package had been accepted by conduct.

1. Main Installation package: The parties had not concluded a binding subcontract by 9 May 2005. Their correspondence showed a continuing disagreement of approximately £37,500 over the price. That issue was not merely a dispute about the application of a discount; it concerned an essential commercial term. The court could not treat the difference as de minimis or non-essential.
2. Parties may agree to be bound while leaving further matters for later agreement, as explained in Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601. That is less likely where the outstanding term is important and depends solely on future negotiation. No independent machinery existed here for determining the price.
3. The parties’ subsequent conduct could not be used to construe the contract, applying James Miller & Partners v Whitworth Street Estates [1970] AC 572. Such conduct might evidence a variation or fresh contract, but neither was alleged. The parties therefore remained governed by the letter of intent, which did not incorporate the arbitration clause.
4. The unresolved insurance arrangements did not prevent contract formation. The claimant’s correspondence indicated that the matter could be documented later and was not treated as a deal breaker.
5. Vacuum Drainage package: The claimant received signed contract documents, raised no effective objection, and proceeded with the work. This amounted to acceptance by conduct of the defendant’s offer, on terms including a valid arbitration clause. The approach was consistent with the reasoning applied in Jarvis Interiors v Galliard Homes [2000] BLR 33, concerning uncertainty in contractual terms.
6. The Isis package was accepted to contain a valid arbitration clause. Proceedings concerning the Vacuum Drainage and Isis packages were stayed under section 9 of the Arbitration Act 1996. The application otherwise failed. Issues concerning additional work and loss caused by suspension were left for determination in the action.