It is a common misconception that a contract is not formed unless it is in writing and signed by the parties.
The recent case of Immingham Storage Company Limited v Clear Plc, however, demonstrates why it is important for businesses to be aware of how a contract might be formed.
In this case the two companies reached agreement via a quotation provided in an exchange of emails which included the phrase “a formal contract will follow”. Despite the fact that no formal agreement was subsequently signed the Court of Appeal found that a contract had been formed because:
- the quotation and other negotiations were not expressly made ‘subject to contract’;
- the quotation was expressly made subject to two other conditions which had been fulfilled;
- all substantial terms had been agreed in the quotation; and
- there was an intention to create legal relations.
If a business does not want to be bound during, for example, its order and sales process, it needs to make it clear that any agreement on the main points is no more than a non-binding pre-agreement.
Use of the phrase “subject to contract” in commercial negotiations will usually create a presumption that the parties do not yet want to be bound. Clearly, however, a vague reference to a formal agreement that will follow will not be enough to achieve this when the main terms are all agreed.
If you would like further advice on your business’s contractual procedures please contact us at email@example.com.