Share on LinkedIn Tweet This Share on Facebook Share Tweet Share Case Comment: Merit Holdings Limited v Michael J Lonsdale Limited  EWHC 2450 (TCC) When does inconsistent conduct amount to a variation of contract? Where parties commence works before a formal contract is executed, is the basis of their contract based on previous expressions of intent or does the conduct set its terms? The High Court (TCC) has recently dealt with a case of this nature, and chose to restrict the situations in which conduct could be said to amount to a variance. The issue in the case concerned the interpretation of the parties’ contractual position where no formal contract was ever expressly agreed to. It was common ground between the two parties that they had operated under some kind of contractual arrangement, but most of the useful evidence was actually in the form of outdated letters of intent which had been contradicted by the parties’ subsequent conduct. Mrs Justice Jefford DBE was asked to declare (in a part 8 claim), that the parties’ conduct created or varied the contractual relationship as evidenced in the letters of intent. The initial letter of intent referred to ‘off-site prefabrication of materials’ pending execution of a formal contract, and undertook to reimburse the costs incurred pursuant to the letter to Merit, the claimant, up to a maximum of £330,000. It also stated that if a binding contract is entered into by the parties, the works authorised by the letter would be treated as work performed under that contract. A subsequent letter raised the maximum value of costs up to £430,000. Merit carried out works, and continued to do so beyond the final date of expiry of the letter of intent. Lonsdale, the defendant, kept paying for the work on a monthly basis. An adjudicator later found that by this stage the parties had evidently agreed on a contract sum, pursuant to which the payments were being made. The payments far exceeded the cap mentioned in the letters of intent. Lonsdale subsequently attempted to terminate the contract, on the basis that Merit had failed to proceed regularly and diligently with the sub-contract works.The parties entered into multiple adjudications, broadly upholding Merit’s claims to payments. On the date of the final adjudication, Lonsdale initiated its own adjudication for a declaration of the ‘final account’. Merit issued part 8 proceedings. Merit formulated the declaration sought as ‘the claimant is entitled to be paid its costs wholly and necessarily incurred on the project’ (para 27) in respect of all works carried out, and that ‘the claimant is entitled to be paid by reference to rates tendered by the Claimant (…)’ (para 29). In effect this amounted to saying that the true contract between the parties did not include the cap on payments, because the parties had by their conduct created a different contract or varied the initial one. Jefford J refused to make the declaration. She held that there was ‘not a shred of evidence’ for the proposition that the parties have agreed (implicitly) to remove the cap on costs. The only evidence is that payments were made for the value of the works in excess of that cap. The most obvious inference was therefore that the parties continued beyond the expiry date of the letter of intent just as they had before, whereby payments made on a value of works basis were not subject to the costs cap. As the parties had already agreed to a contract sum, it made sense for Merit to be paid for the works in accordance with that putative contract sum because it was anticipated that a contract would be concluded for that amount. Merit had not been claiming these sums on a costs basis, which would have gone against the letters of intent. Jefford J therefore rejected the declaration, and made no further declarations because of a discomfort about the use of part 8 proceedings where the facts were unclear. While the lesson against bringing part 8 proceedings where factual disputes could arise should also be heeded, the more important aspect of the case is the primacy of written expressions of intent over those made by conduct. Essentially, Jefford J’s judgment upholds the content of the letters of intent not because nothing in the parties’ conduct contradicted it, but because it was possible to interpret it as not having been contradicted. She even seems to add the requirement of specific evidence, beyond the conduct itself, that the approach of the letter of intent was indeed abandoned. Where such evidence could not be found, the written word reigned supreme. This point has some novelty about it, and was not entirely covered by the classic Brogden v Metropolitan Railway (1877) 2 App Cas 666. There the parties had acted in accordance with the written document (short of a valid contract), and the parties had therefore accepted the contract by their conduct. Here the parties are acting inconsistently to the written document, but the court held them to that document anyway. Contact us This case review was written by our Construction Team. If you would like to discuss any of the topics in this article, please contact our Marketing and Business Development Director, Sally Wollaston.