Julie Bond, litigation and arbitration partner at Oxford law firm Manches, examines what recourse firms have when a client cancels a contract The cancellation of government or private projects usually involves cancelling contracts with business, or not proceeding with them while they are still in the course of negotiation.

The lost time and effort can be enormous but what about the lost transaction costs?

It is not uncommon, particularly in complex projects, for work to have started before all the legal documents are signed off, and a contractor caught in this position can find himself facing the costs of development work, materials and legal bills with no obvious way of getting them back.

The basic position in English law is that expenditure incurred before a contract is agreed at the party’s own risk and if the contract is never finalised there is no claim for the expenses incurred in the course of negotiations, for example in producing a tender.

However this, as in other areas of English law, is only a starting position and a lot depends on the facts.

First, are you absolutely sure that a contract has not been made? Sometimes the cancellation of the contract may be attempted too late and the contract may already have come into existence.

Second, it may be that while the whole contract has not come into existence in the way expected, there is a side agreement about paying for preliminary work which stands on its own.

Collateral contracts of this type might be found, for example, in an exchange of e-mails, but their existence is sometimes clear from the conduct of the parties.

This might arise where a manufacturer had agreed to make tooling or samples of a product for a customer ahead of production, bought equipment or carried out preliminary work on a building site.

Even though you may not have agreed a specific price, it may still be possible for the law to imply agreement that a reasonable price would be paid for what was done.

If there is no collateral contract, but it is clear that the work was carried out on the understanding that it would be paid for as part of the contract which never came into existence, there may still be a legal basis for obtaining compensation for the expenditure.

This is somewhat undeveloped territory as far as English law is concerned, but nonetheless there are cases where applying broad principles of fairness, the Court has been prepared to order payment of wasted costs where the scale of the preliminary work done was such that no-one could reasonably have expected that it would be done for nothing.

Or it could be the work was of a type that would have had to be done as part of the contract, and where it was clearly done at the request of the party who is refusing to pay but who has one way or the other received some benefit from it.

This is all very well, but clearly it is better not to have to resort to indirect methods of making claims and if you are in the course of negotiating a contract which involves preliminary expenditure, it would be better to make sure you have clear agreement up front about payment for preliminary work.

It is also worth thinking about who you are contracting with. Some European jurisdictions have a statutory requirement that parties owe duties of good faith while in the course of contractual negotiations, which would lead to a clear claim for wasted costs if the contract fails to materialise.

Those contracting with European partners subject to the law of their local jurisdiction may be in a better position than those who are not.

European companies negotiating with English partners for contracts subject to English law and jurisdiction may be at particular risk by reason of the provisions of the international conventions that determine what jurisdiction will apply. This is worth checking.

As usual, the best advice is to think ahead, but where businesses have been caught out by shifts in policy, they should not immediately give up.

Contact: Julie Bond, 01865 813609.

Web: www.manches.com