Recently we have come across a number of disputes in relation to contract formation where one party has attempted to get out of the contract on the basis that certain formalities (such as approval by the Board) were not observed, or by arguing that the parties exchanged standard form contracts and never agreed on which terms should apply (sometimes known as the "battle of forms").

Some of the disputes arise as a result of different business practices between Chinese companies and their foreign counterparties. Since English law is usually the governing law for international shipping and trade contracts, it is important for Chinese companies to be aware of basic English law principles in relation to contract formation when doing business with international companies so as to avoid potential disputes in future.

In this article, we discuss the relevant principles of English law in relation to the formation of contracts and what Chinese companies can do to minimise the risk of disputes.

Contract formation – English law position

At common law, the formation of contract requires very little formality. Provided there is offer, acceptance, consideration, communication of the acceptance and certainty as to the key terms of the contract, a contract will arise. “A feature of a nominate contract such as sale is that very little is required to have the result that parties may be bound in a quite complex way; the exchange of a few words in whatever medium the parties choose to adopt or a simple act such as the selection of goods exposed by a shopkeeper may suffice.” (West v Castlehill LLP [2008] CSOH 182). As such, exchanges by emails, instant messages or even text messages can be used to form a contract under English law (so, for example a contract could be concluded by Wechat or QQ). Generally, it is not necessary to have a formal written contract signed and / or stamped by both parties.

Further, under the doctrine of ostensible authority, an agent who has entered into a contract on behalf of a principal will bind the principal if he or she been cloaked with the authority to enter into contracts. That contract will be binding on the principal even if the agent did not have actual authority to enter into it. In such cases, the principal will not be able to avoid a contract by saying that it was not aware of the agent's actions and that the agent did not have the requisite approvals from the Board or the General Manager.

Sometimes each party may purport to introduce a set of standard terms, and it then becomes difficult to decide which set of terms is to prevail – the so-called "battle of forms". If an offer is made on certain terms and the offeree provides for different terms, there is a counter-offer, and no contract is reached unless the new terms are accepted. But if, as is common, the parties have agreed the key terms - in a sale of goods contract the key terms would be a description of the goods, the quantity, price and shipping arrangements - it may be difficult to argue that there is no contract, although it may be hard to say with any degree of certainty exactly what the terms are beyond those essential terms. It will be more difficult to say no contract has been formed if the parties have already taken steps to perform, such as by delivering goods or transferring funds.

Where conflicting communications are exchanged, each is a counter-offer. If a contract is finally formed, which may be the case if there is acceptance by conduct, it must be on the terms of the final communication in the correspondence leading to the conclusion of the contract. This is known as the "last shot" doctrine. However, this doctrine may be displaced by evidence of the parties' objective intention that the “last shot” should not prevail. For example if each party has made it absolutely clear that it will not accept and never contract on the other's terms it may be that neither set of terms applies.

Tips for Chinese companies

It is important for the commercial people in Chinese companies to bear in mind that English law does not require any particular formality for a formation of contract. This is particularly true in the shipping industry where the prevailing practice is that a charterparty / fixture can simply be concluded by exchange of messages. If a certain formality is requested (such as a formal written contract or approval from the Board), it must be expressly conveyed to the other party and one must be careful not to do anything / say anything that may indicate that there is a binding contract until such formality is completed.

As for the issue of "battle of the forms", the best way to win the battle is by careful draftsmanship and by being careful not to take any steps that may be deemed to be acceptance by conduct. If you do not wish to accept the other parties terms, you should say so clearly and in writing. Further, you should not begin to perform the contract unless you are certain all of the key terms of the contract have been agreed. This may sound obvious, but there are literally hundreds of cases in the law reports where failure to adhere to these simple steps has resulted in lengthy and costly litigation.