Contract Formation by Conduct — When Behaviour Binds

In construction procurement, the gap between commercial agreement and formal execution is often filled by activity. Contractors start on site. Employers receive work. Invoices are submitted and partially paid. Months pass. Then something goes wrong — and both parties discover that no one ever signed the contract.

The Problem

The absence of a signed contract does not mean there is no contract. English law, and most civil law systems, recognise that a contract can be formed by the conduct of the parties. The problem is that conduct-based contracts are inherently uncertain in their terms, creating fertile ground for dispute about what was actually agreed.

Common scenarios in construction include: works commence before all commercial terms are finalised; the contractor starts on site following a letter of award without waiting for the formal contract to be returned; or a verbal instruction to proceed is given and acted upon. In each case, a court examining the dispute will ask: did the parties intend to contract, did they reach agreement on the essential terms, and was there consideration?

The Legal Principle

The foundational principle is that courts will objectively assess whether a reasonable person, observing the parties’ conduct, would conclude that a contract had been formed. In G Percy Trentham Ltd v Archital Luxfer [1993] 1 Lloyd’s Rep 25, the Court of Appeal confirmed that a contract can crystallise during the performance of works, even if all terms were not agreed at the outset.

Where a contract is found to have been formed by conduct, the court must then determine its terms. This is typically done by reference to the last document in the pre-contract exchange that was not expressly rejected — often the employer’s standard form or the contractor’s tender. The party whose terms are incorporated may have a significant advantage.

Practical Application

For contractors: never commence works without at minimum a letter of intent identifying the contract terms that will govern. If the formal contract has not been executed, write to the employer identifying the terms on which you are proceeding and inviting confirmation. Do not assume that your tender conditions or standard terms are incorporated simply because you submitted them — the employer’s award letter may incorporate their own terms by reference.

For employers: issue formal contracts promptly after award. Do not allow contractors to commence on site without at minimum a signed letter of intent. Ensure that any pre-contract communications reference the contract terms that are to apply.

Risks

The risks of conduct-based contracts cut both ways. For the contractor, the absence of formal contract terms means the loss of carefully negotiated protections: limitation of liability, dispute resolution procedures, notice requirements, and payment provisions may all be absent or replaced by unfavourable implied terms. For the employer, an implied contract may not include liquidated damages provisions, allowing the contractor to claim only general damages for delay on a time-at-large basis.

Mitigation

The single most effective mitigation is to execute the formal contract before works commence. Where this is not possible, a well-drafted letter of intent incorporating the contract terms by reference, and signed by both parties, provides a workable alternative. Maintain a contract execution register to track the status of every contract in the programme.

Conclusion

Contracts formed by conduct are an avoidable problem. The pressure to start works quickly is real, but the risk of starting without a formal agreement in place is greater. The cost of delay in contract execution rarely exceeds the cost of a dispute about what was or was not agreed.