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Be careful when you race to perform an agreement

Kerry Chan

In CRS v McLaren, the High Court, quoting RTS, reiterated that the court should not impose binding contracts on parties which they have not reached.

CRS and McLaren entered into a heads of agreement, which envisaged that a more detailed, formal contract would be agreed. This never happened, but the project, for a GT4 racing car based on McLaren’s road car, started anyway.

The court acknowledged that where a transaction was performed on both sides, it will often make it unrealistic to argue that there was no intention to enter into legal relations and difficult to submit the contract is void for vagueness. But not impossible.

Ultimately, the court held that the agreement was not a legally binding contract; rather it was an outline agreement in principle. The following factors supported its conclusion:

  • the parties were sophisticated and understood what provisions a binding contract would usually contain;
  • the language of the agreement was casual, vague and “non-legal”;
  • the agreement did not address matters of considerable commercial significance, for example, the ownership and use of tooling, the vehicle specification and, most importantly, the ownership of intellectual property rights in the designs;
  • the correspondence between the parties suggested that the agreement was not understood or intended to be legally binding;
  • the parties knew that it would take some time to agree a binding contract, so they set out the agreed outline of the project and ensured that their respective roles in the agreement were understood; and,
  • the relationship between the parties meant they were prepared to proceed without a binding agreement on the assumption that one would be agreed or that the risk was worth taking.

The significant continuing work done after the agreement did not change the court’s mind since:

  • throughout the period that the work was carried out, the parties knew that contractual negotiations had not been completed;
  • at no time did the parties agree the crucial issue as to intellectual property rights;
  • CRS insisted on legally binding one-off purchase orders for parts and car sets precisely because CRS was unable to obtain a contract from McLaren for the project as a whole; and,
  • the communications between the parties showed that the parties did not understand that a contract had come into force.

Update: permission to appeal has been sought