14 July 2011 | Liz Fletcher

If a formal contract is never signed, when does it become binding?

The case

Immingham entered into negotiations with Clear for the storage of diesel fuel. A quotation was emailed to Clear, headed in bold capitals “Subject to board approval and tankage availability”, stating “a formal contract will follow in due course”. Clear returned the quote, signed. Immingham confirmed it would seek approval and revert back.

Immingham emailed Clear confirming Board approval with a subject heading “Contract Confirmation”. It included the wording “our full contract for this business will now be raised… and sent for your signature and return.” The “formal contract” was emailed to Clear, but was not signed or returned.

Clear did not utilise the storage, invoices were not paid and Clear denied the existence of a binding contract, claiming it had not signed the “formal contract”. Immingham argued the contract was formed by its acceptance of Clear’s return of the signed quote.

The Court of Appeal said the quote was not made “subject to contract”, and both conditions had been fulfilled and all substantial terms had been agreed between the parties. It held Immingham’s subsequent email was the point at which a binding contract was formed. The quote signed and returned by Clear was an offer to Immingham, which Immingham accepted in due course.

What it means

The Court has shown it will look at the intentions of the parties and their surrounding circumstances to come to a decision on whether a contract has been formed.

Parties need to make it clear in all correspondence if they do not intend to be bound by an agreement. The use of “subject to contract”, while not guaranteed, creates a strong presumption of demonstrating the intention of the parties. But it is also important that organisations put in place well thought out contract management procedures for staff when negotiating, finalising and renewing deals.

This could save the need for the effort in time and money involved in this type of litigation and avoid a situation arising from the other party relying on a technicality to relieve themselves of a bad bargain.

☛ Liz Fletcher is an associate at Hugh James