When negotiating and finalising your commercial contracts, you should be certain a final agreement has in fact been reached. A 2018 decsion was a useful reminder for businesses to ensure a legally binding written contract is in place, rather than relying on previous communications to claim a contract was in place.
What’s the test for a legally binding contract? For a legally binding contract to exist, the following elements must occur: offer, acceptance, consideration (e.g. a payment of money or something else of value or a promise), and an intention on all parties to be legally bound by the agreed terms. It must also be established that there is certainty of terms.
What’s the background? In the Rosalina Investments case, a sportswear manufacture had a contract with a footballer’s management company under which the footballer endorsed its products. The contract ended and the parties entered into negotiations for the possibility of an extension or new contract. During this period, the athlete continued to wear and promote merchandise provided by the sportswear company, however the sportswear company decided that they no longer wanted to pursue negotiations and proposed to pay an amount to recognise the services provided during the time the extension discussions took place. The management company claimed that a binding contract had been reached, even though no formal written contract had been signed. It argued that a contract had been concluded through email communications and, by breaking-off negotiations, the contract had been breached.
The High Court struck out the sportswear company’s claim for £2m in lost retainer and damages against the management company. On the facts, the parties had not intended to create a legally binding contract unless and until a formal written contract was signed. Looking at the full run of communications between the parties, it was plain to the Court that the parties intended to be bound only when all parties had signed. This did not happen.
In fact, one of the key factors was the language used by the parties – of signatures, of speaking of “amendments/changes” not “variations” – was ‘highly suggestive of a contract not yet over the finishing line.’ Most significantly, there was a communication by a management company representative to the sportswear company party of the footballer’s refusal to attend any further personal appearances until the new contract was signed. In addition, the court applied the rule from the Global Asset Capital Inc case of 20172 that the courts could look at the whole course of negotiations, not just those up to a certain date. The courts therefore made an assessment of the parties’ intentions by looking at all correspondence.
What does this mean? Legally binding agreements can, and frequently are, concluded through email and other forms of communications. Contracts can also be formed orally. Where the legal essentials of a binding contract can be ascertained from such communications, the terms can be enforced.
However, where the evidence shows no such intention on the part of one of the parties, the other cannot claim a binding contract is in force.
If businesses are negotiating contract terms and are keen to have them concluded with certainty, a written contract should be drawn up and properly executed to ensure that the agreed arrangements are legally binding.
Equally, where the parties are in conversations or negotiations to which they do not wish to be legally bound unless and until a formal written agreement is entered in to, it should be made clear that such conversations or negotiations are “subject to contract” to reduce the likelihood of the parties unintentionally becoming legally bound to them.