A couple of recent court decisions should send out warning signals to parties negotiating contracts as it now appears that the conduct of the parties whilst the contract remains unsigned may have unexpected consequences...
In a recent case, the High Court held that even though the contract itself was not signed, an email exchange whereby a seller of shares confirmed to the purchaser’s agent that he was willing to proceed on and accept the terms of a draft contract was enough to bind the parties to its terms (Grant v Bragg).
However, in a recent Court of Appeal case, the parties continued to provide and pay for services even though the letter of intent they had signed had expired. The Court held that a clause in the as yet unsigned contract, which said that the contract did not become effective until parties had executed and exchanged counterparts, prevented the contract from coming into existence until this condition was fulfilled. (RTS Flexible Systems v Molkerei Alois Müller GmbH).
These cases are a reminder that parties should ensure that their conduct reflects their intentions. Letters of intent should generally be used (and extended where necessary) which include relevant binding obligations as required before the contract is agreed and signed. If a party does not intend to be bound, it should ensure that its conduct reflects this, for example, by conducting negotiations on a ‘subject to contract’ basis or expressly declaring that their conduct is not binding.