To bind or not to bind?

Beware of creating a contract where none is intended

In an ideal world contractual relations would always be created by the clear and unambiguous setting out of the agreed terms in a document signed by both parties. However, in our imperfect world, to get to that point, there will usually be multiple exchanges of correspondence to negotiate the contractual terms and there may be an executed term sheet or heads of terms (‘Heads’) setting out the key commercial terms.

Even where they are signed by the parties, it is usually the intention that Heads are not legally binding. This is because they only set out the headline commercial points and the details will not have been fleshed out. Likewise it would not usually be intended that email exchanges would create a contract.

Unless care is taken in these preliminary communications, there is a danger you could inadvertently bind yourself contractually to terms you did not intend.

Careless communication

The UK courts have held that if it can be shown from an exchange of correspondence that there was an intention to be bound by what was in the email, then the email sign off could constitute a signature for legal contractual purposes. Email is increasingly used as the primary means of business communication and it is important to be aware that you can be held to the content of your emails in certain circumstances.

Therefore, where your email communication is in the context of negotiation, it should be noted as being ‘subject to contract’.

Memorandum of mis-understanding

It is a common misconception that by calling a document Heads of Terms, Memorandum of Understanding or one of the other commonly used labels, this is sufficient to avoid creating a legally binding contract. This is not the case. The fact that the document may refer to an intention to enter into more formal contracts at a later date will not necessarily be sufficient demonstrate the parties do not intend to create legal relations until that time. Therefore, any such document should clearly note that it is ‘subject to contract’ and specify that it is not intended to be legally binding. For more information on Heads of Terms see our previous related article click here.

Subject to Contract

Unfortunately, while marking documents or communications as ‘subject to contract’ is helpful it is not a panacea. It creates a strong presumption that it was not intended that a contract would be created but is not conclusive.

There are a number of things to consider:-

• The exact phrase ‘subject to contract’ ‘subject to contract /contract denied’ or should be used and not any approximation.

• Other language in the communications should not contradict the use of the condition such as confirming that there is agreement or a deal done.

• It should be clear to the counterparty that the communication is intended to be ‘subject to contract’, for example, including it in the small print of a standard email sign off as a matter of course is unlikely to suffice.

• A court will consider the factual matrix.  If, notwithstanding that a communication or a signed Heads was marked ‘subject to contract’ where all essential elements are agreed, a contract can be created. This is particularly so where the parties proceed to give effect to those terms notwithstanding that the formal contract is not finalised.

Accordingly, you should be careful to explicitly provide that the document or communication are not intended to be legally binding. Otherwise you may find yourself inadvertently bound to an unwanted contract that is difficult and/or costly to resile from.

For further information please contact Elaine McGrath emcgrath@reddycharlton.ie who advises on all aspect of commercial contracting.