17 February 2015

Unsigned contracts can be binding

Not worth the paper it isn't written on?

A recent High Court case is the latest reminder that even where the parties intend to enter into a formal written contract, they can become bound by the contract even before it is signed.

Most kinds of contract do not need any particular formality, such as written terms or a signature (property contracts being a notable exception). Written terms can be accepted orally. Contract terms can be accepted by conduct, even where the written terms make it clear that a formal signature was expected, and even where there are remaining terms that have not been agreed.
In A v B the buyer of a large quantity of cotton did not sign the purchase contracts, but did initiate the price fixing mechanism under the contract terms. The court held that this was unequivocal acceptance of the contract terms, so the buyer was bound by the contract. The seller was awarded over US$7m.

This is not new: if the parties work under the terms of a document, even a draft document, the court is likely to conclude that they intended those terms to be binding. Similar cases include RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) in the Supreme Court in 2010, and it was held long ago that the partnership deed for a solicitors' firm became binding even though it was never formally executed.

Once commercial parties start to work together, the court will be very reluctant to find that there is no contractual relationship. The question then is what the agreed terms are. the most obvious source is the latest draft of the proposed written contract. that seems obvious, if all the terms were in fact agreed; but what if one party was holding out for something they regarded as important, which the other side clearly had not agreed? In RTS v Muller the Supreme Court said "an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement." So it is bad luck, or carelessness, on the part of the person arguing for the extra condition.

The same applies to an agreement that is expressly "subject to contract". If the parties start to work to the terms, the court is likely to say that the "subject to contract" position has been waived.

There would be no contract if all the "essential" terms were not agreed, but what is "essential" is just the legal minimum to create a binding contract. The law does not require all commercially-sensible terms to have been agreed - just price and quantity may be enough.

These cases are over the negotiation of bespoke terms, but they are related to the "battles of the forms" where both sides try to impose their standard terms - usually the buyer is assumed to have accepted the seller's terms by accepting delivery of the goods.

How should you protect yourself? If you must start work on a project before the formal contract is signed, it is best to have an interim agreement (often called a letter of intent) that sets out the terms for the immediate work, and what will happen if the parties fail to reach agreement on the main contract. An agreement to agree is generally unenforceable, so the interim agreement should include terms to unwind the relationship and ensure that no-one loses out unfairly if the terms do not get agreed.

1 comment:

  1. Another case shows the unexpected results that can flow from working while contract negotiations continue. The Court of Appeal overruled the previous judge and said that a limitation of liability clause under discussion had been incorporated in the contract - saving the party around £40m. Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd [2018] EWCA Civ 2222 (10 October 2018)


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