In the fast and furious business world the emphasis is always upon the need to get the deal done and as quickly as possible. Often it is only much later after the transaction is completed that questions are thrown up as to whether a contract was made and if so upon what terms? Lawyers are then engaged many months or years later in order to examine the communications that took place at the time when the deal was made to answer these questions.
T he widespread use of e mails and the internet has led to the increased need for lawyers to unpick these communications to establish whether a contract has been made or not, and if so upon what terms, where a signed contract does not exist. A dispute may arise over the existence and terms of the contract and the court is asked to unravel what happened at the time. The courts will look for the usual ingredients that make up a contract, including offer and acceptance, in the exchange of e mails sent at lightning speed, as well as oral and other forms of communication. They will search for courses of dealing and the mutual intention to create a legally binding agreement.
What does it take to make a binding contract?
Some of the questions to be asked by the court sound like nothing more than common sense but the important point is that the court will look to see what communications were made, what they were intended to mean and what they actually meant?
The principles of contract formation are summarised in the Supreme Court in RTS Ltd v Molkerei Alois Muller GmbH & Co [2010] 1 WLR 753 and they serve as a check list. Whether there is a binding contract between the parties and, if so, upon what terms:
- depends upon what they have agreed.
- depends not upon their subjective state of mind, in what was communicated between them by words or conduct,
- whether that leads objective intention to create legal relations,
- whether they had agreed upon all the terms that are essential for the formation of legally binding relations,
- whether certain terms of economic or other significance to the parties have or have not been finalised. This may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement,
- each case depends upon its own facts,
- it does not follow from the fact that the work was performed that the parties must have entered into a contract,
- on the other hand, it is plainly a very relevant factor pointing in that direction,
- whether the court will hold that a binding contract was made depends upon all the circumstances of the case, of which performance is but one factor.
The courts will not take away the parties freedom to decide what the agreement contains. In Pagnan SpA v Feed Products [1987] 2 Lloyds Rep 601 the court decided that it is for the parties to decide whether particular terms are of economic significance and whether the need for agreement on those terms is a precondition to a concluded agreement.
- In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole,
- Even if the parties have reached agreement on all the terms, they may intend that the contract shall not become binding until some further condition has been fulfilled, that is ‘subject to contract’.
- Or that it shall not become binding until some further term or terms have been agreed,
- Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled
- If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such
- further terms renders the contract as a whole unworkable or void for uncertainty.
- It is sometimes said that the parties must agree on the essential terms and it is only matters of detail which can be left over. ‘Essential’ means a term which is what the parties decide whether they wish to be bound and if so, by what terms, whether important or unimportant. The parties are ‘the masters of their contractual fate’.
- The more important the term is the less likely it is that the parties will have left it for future decision. Parties sometimes enter into ‘heads of agreement’. Merely because work has been performed does not mean there is a concluded contract.
- In most cases, the performance of work is a very relevant factor pointing in the direction of a concluded contract. This was said by the Court of Appeal in Galliard Homes Ltd -v- J Jarvis & Sons Ltd (1999) 71 Con LR 219.
What is the solution? The only safe solution to avoid the pitfalls of not having a signed contract is to employ lawyers at the time the deal is being negotiated to make sure your business is protected against the unintended consequences of not having a written contract in place or of not having a contract on terms that have been properly agreed.
