chapter  v
Johnson (p 425). The second reason is the ‘subject to contract rule. This rule can be seen within a variety of contexts. First, it can be seen as an application of the intention to create legal relations requirement; the parties (or one party at least) do not intend a binding contract until formal exchange of contracts. Secondly, it can be seen as a variation of the consensus ad idem rule; the parties are not to be considered ‘at one’ until exchange. Thirdly, it could, perhaps, be seen in terms of the rule of certainty; there is no contract until all the major terms are agreed upon and this does not happen formally until exchange of contracts. Thus, even if a party has ‘agreed’ a price with a buyer, this price is not regarded as a certainty until exchange. The point of raising these different contexts is that they are very important factual perspectives to contract. There are many relationships which are ambiguous: the ‘contract’ in which a price is yet to be fixed; the ‘contract’ where some further details are yet to be negotiated (see, for example, May and Butcher Ltd v R [1934] 2 KB 17); the ‘contract’ where parties have worked out all the terms in great detail, but still do not, as yet, wish to be contractually bound. How should the law of obligations deal with these kinds of situation? If one party to a sale ‘contract’ has actually delivered the goods to the other party despite the fact that the two parties have not agreed a price, is there a contract? In many situations, the question may not be that important; even if there were to be no contract, the buyer will normally be liable in restitution to pay a reasonable sum (but see Sale of Goods Act 1979, s 8, and see the next case, below). Yet often, there may just be a décalage between the formal rules of contract and commercial practice which only comes to light when things go wrong.
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As a matter of analysis the contract (if any) which may come into existence following a letter of intent may take one of two forms: either there may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other; or there may be what is sometimes called an ‘if contract, that is, a contract under which A requests B to carry out a certain performance and promises B that, if he does so, he will receive a certain performance in return, usually remuneration for her performance. The latter transaction is really no more than a standing offer which, if acted on before it lapses or is lawfully withdrawn, will result in a binding contract…

In my judgment, the true analysis of the situation is simply this. Both parties confidently expected a formal contract to eventuate. In these circumstances, to expedite performance under that anticipated contract, one requested the other to commence the contract work, and the other 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. Consistently with that solution, the party making the request may find himself liable to pay for work which he would not have had to pay for as such if the anticipated contract had come into existence, for example, preparatory work which will, if the contract is made, be allowed for in the price of the finished work… I only wish to add to this part of my judgment the footnote that, even if I had concluded that in the circumstances of the present case there was a contract between the parties and that that contract was of the kind I have described as an ‘if’ contract, then I would still have concluded that there was no obligation under that contract on the part of BSC to continue with or complete the contract work, and therefore no obligation on their part to complete the work within a reasonable time. However, my conclusion in the present case is that the parties never entered into any contract at all.