Merit Holdings Ltd v Michael J Lonsdale Ltd

Part 8 is appropriate only where the question is unlikely to involve a substantial dispute of fact and is framed with sufficient precision to permit a precise answer. A court should exercise caution before using it to determine the nature of an ongoing contractual relationship from the parties’ conduct, particularly where several contractual interpretations remain reasonably possible. Continued performance and payment after a letter of intent expires may establish a contractual arrangement, but the court must infer its terms objectively from the parties’ conduct and the commercial context. Payment by reference to an agreed contract sum does not, without supporting evidence, establish an agreement to remove a stated cap or to replace valuation-based payment with reimbursement of costs.

The claimant, a specialist contractor, sought a declaration under Part 8 concerning the basis on which it was entitled to payment for mechanical pipework works carried out for the defendant. The parties had operated under successive letters of intent, each containing a payment cap and providing for reimbursement of costs. Work continued after the final letter expired, while applications and payments were made by reference to the value of the works and an agreed contract sum.

An adjudicator had decided that the claimant’s entitlement was based on the agreed Contract Sum and Quantified Schedule of Rates. The claimant contended that the parties’ later conduct extended the final letter of intent and removed its cap, entitling it to payment of costs wholly and necessarily incurred. The central questions were whether that agreement could be inferred and whether the Part 8 procedure was suitable for determining the wider contractual relationship.

1. Part 8 procedure. Under Civil Procedure Rules 1998 Part 8, the court should decide a question unlikely to involve a substantial dispute of fact. The question must also be framed with sufficient precision and be capable of a precise answer. The procedure should not be deployed merely because a claim has some connection with an adjudication. Applications concerning the substance of an adjudicator’s decision, rather than the constitution of an adjudication, should not automatically be treated as adjudication business.
2. Objective inference from conduct. The claimant’s case required an inference that the parties had both extended the expiry date of the final letter of intent and removed its cap. The evidence did not support that inference. Throughout the project, applications and payments were made on a valuation or percentage-completion basis, including after expiry, and not on the basis of costs wholly and necessarily incurred.
3. The requirement in the letters of intent for written agreement before exceeding the cap made it especially difficult to infer that the parties had silently abandoned the cap and accepted unlimited reimbursement of costs. The more obvious commercial inference was that payment continued by reference to the agreed contract sum, which operated as a cap reflecting the value of the work.
4. The court declined to determine the parties’ complete contractual relationship. Several materially different possibilities remained, including continuation or replacement of the letters of intent, a simple contract for part or all of the works, and incorporation of standard terms. Those possibilities affected potential obligations, breaches and damages, and could not properly be resolved in the limited factual setting of the Part 8 proceedings.
5. The declaration sought by the claimant was refused. No alternative declaration was made. The proceedings remained alive pending further submissions, including on whether they should be treated as Part 7 proceedings.