Saying “subject to contract” could be crucial
31/05/2011 in Corporate, Mergers & Acquisitions, Commercial
Saying that a formal contract will follow in due course does not mean that parties to negotiations will not be bound if one is never signed, according to a recent Court of Appeal decision.
Unless negotiations are clearly expressed to be “subject to contract”, a contract may be formed at the point at which all the key terms are agreed, following the decision in Immingham Storage Company Ltd v Clear Plc.
In 2008 Immingham (a storage company) and Clear (a commodities trader) negotiated terms for the storage of some diesel fuel.
Once terms were agreed, Immingham sent Clear a quotation, setting a deadline of 3 January 2009 for Clear to accept. The email made clear that the quotation was “subject to board approval and tankage availability” but imposed no other conditions.
The quotation identified all the key terms: the parties; the product; the type and capacity of storage; the price; the start date; and the duration. It was signed by Immingham and, above the space for signature by Clear, used the wording “We hereby accept the terms of your quotation subject to board approval”.
Clear signed the quotation and faxed it back. On 9 January 2011 Immingham then emailed Clear to say that board approval and tankage availability had been secured; that Clear was guaranteed storage space from the agreed date; and that a formal contract would follow. The contract was sent to Clear but never signed.
In the event, Clear was unable to source the fuel it required and so did not use the storage reserved for it. Immingham invoiced for the space but Clear refused to pay, arguing that it was not bound as it had not signed the formal contract. The Court of Appeal disagreed.
The decision illustrates the risks parties take where they enter into negotiations without making clear at the outset how and when they intend to be bound.
Under English law, there is no requirement for a contract to be formally recorded in order for it to be enforceable. If two parties have reached an agreement (that is, if one has made an offer and the other has accepted the terms of that offer); if it is clear they intended to be bound by the terms of that agreement; and provided they also agreed some form of “consideration” (such as a price), then a binding contract may have been formed.
In the Immingham case, the court noted that the quotation had been given subject to only two conditions (board approval and tankage availability). Once these conditions had been fulfilled, the parties were bound.
Remember “subject to contract”
To avoid the effect of these principles, parties should always make clear at the outset whether negotiations are “subject to contract”. This phrase has a distinct legal meaning and gives rise to a presumption that the parties do not intend to be bound unless and until they sign a formal written agreement.
To read the full judgment in this case of Immingham Storage Company Ltd v Clear plc, please click here.
For more information on these issues please contact Barnaby Stokes or your usual Lewis Silkin contact.