British Steel Corp v Cleveland Bridge [1984] 1 All ER 504; QB

Facts

Cleveland Bridge and Engineering Co Ltd (CBE) were contracted to construct the steel framework for a building in Jeddah, Saudi Arabia. They required a significant quantity of specialised cast steel nodes for this project. CBE sent a ‘letter of intent’ to British Steel Corp (BSC) requesting that BSC commence production of these nodes immediately, in anticipation of a formal contract being finalised. Negotiations on the formal contract proceeded but ultimately failed. A key point of contention was the liability clause; BSC insisted on a clause excluding liability for consequential loss arising from late delivery, whereas CBE sought to impose unlimited liability on BSC for such losses. Despite the failure to agree on these essential terms and finalise a contract, BSC proceeded with the manufacturing process based on the letter of intent and delivered all but one of the 137 nodes. BSC then sued for the value of the steel nodes. CBE counterclaimed for damages, alleging that the nodes were delivered late and not in the correct sequence, constituting a breach of contract.

Issues

The central legal questions before the court were:

1. Was a binding contract formed between BSC and CBE, either through the letter of intent or by the subsequent conduct of the parties?
2. If no contract was formed, on what legal basis could BSC claim payment for the work they had performed and the nodes they had delivered?
3. Could CBE’s counterclaim for damages for late delivery succeed in the absence of a formal contract specifying delivery obligations?

Judgment

The judgment was delivered by Robert Goff J (as he then was) in the Queen’s Bench Division. He concluded that no binding contract had been formed between the parties.

Reasoning on Contract Formation

Robert Goff J held that the letter of intent was not, in itself, an executory contract. It was a request to commence work in anticipation of a contract that was expected to be concluded shortly. The ongoing and ultimately failed negotiations over fundamental terms, specifically the liability for late delivery, demonstrated that the parties had not reached a ‘consensus ad idem’ (a meeting of the minds) necessary for contract formation. It was impossible for the court to determine what the terms of such a contract would have been had it been finalised. Therefore, there was no contract to enforce.

Reasoning on Restitution and Quantum Meruit

Despite the absence of a contract, the court found that BSC was entitled to be paid for the work performed. This entitlement arose not from contract law, but from the law of restitution (also known as quasi-contract or unjust enrichment). CBE had requested the work, and BSC had performed it, thereby conferring a benefit on CBE. It would be unjust for CBE to retain this benefit without paying for it. BSC’s claim succeeded on a quantum meruit basis, meaning they were entitled to a reasonable sum for the work done. The judge articulated the principle as follows:

Both parties confidently expected a formal contract to eventuate. In these circumstances, to expedite performance under that anticipated contract, one party requested the other to commence the contract work, and the other party complied with that request. If, thereafter, as anticipated, a contract was entered into, the work done as requested will be treated as having been performed under that contract; if, contrary to their expectation, no contract was entered into, then the performance of the work is not referable to any contract the terms of which can be ascertained, and the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as has been done pursuant to that request, such an obligation sounding in quasi contract or, as we now say, in restitution.

As there was no contract, CBE’s counterclaim for damages for breach of contract (specifically, for late delivery) necessarily failed. There cannot be a breach of an obligation that does not exist.

Implications

This case is a leading authority on letters of intent and the application of restitutionary remedies where a contract fails to materialise. It underscores the significant commercial risk of commencing performance before all essential terms of a contract have been agreed upon and finalised. The decision clarifies that a letter of intent is generally not a substitute for a formal contract and may not be legally binding, especially when substantial terms remain in negotiation. The judgment solidified the role of quantum meruit as a vital tool of the law of restitution, ensuring that a party who performs work at another’s request is compensated, preventing the unjust enrichment of the party who received the benefit of that work. It clearly separates contractual obligations from restitutionary ones, demonstrating that a remedy can exist even when a contract does not.

Verdict: British Steel Corporation’s claim for payment for the work performed on a quantum meruit basis was successful. Cleveland Bridge’s counterclaim for damages for late delivery was dismissed as no contract had been formed.

Source: British Steel Corp v Cleveland Bridge [1984] 1 All ER 504; QB