Very rarely do two parties to a contract instantly agree on all the relevant terms – though they could certainly reduce their legal costs if they did. Instead, reaching agreement can be a long, drawn out process with detailed negotiations taking place, and offers and counter offers being made, before the parties finally shake hands. But at what point in those proceedings will the parties become contractually bound?

Does an agreement exist?

This is a question of fact: once all the applicable terms relating to the relevant subject matter are agreed a contract will be formed  even if the parties agree that the relevant terms should be recorded in a formal written agreement. Whether the parties intend to be bound in such circumstances, or whether they only intend to be bound once the formal agreement is signed, will be determined by objectively assessing their words and conduct to see what their intentions were.

The magic words…

This is why parties often use wording such as ‘subject to contract’ within contractual negotiations, making it clear that they do not intend to be bound until a formal contract is signed. In a recent case the High Court held that the absence of these words was a relevant factor in deciding whether or not a binding agreement existed.

The facts

The case involved negotiations between solicitors to settle a claim between their respective clients. In a letter from the defendant’s solicitors an offer was made to “settle the entire proceedings by paying the Claimant…[the Settlement Sum]…such settlement to be recorded in a suitably worded agreement”. The letter set out a deadline by which the offer must be accepted and, before the expiry of that deadline, the claimant’s solicitors wrote to confirm that “the Claimant accepts the terms of your client’s offer”. The solicitors then began to work on the “suitably worded agreement” but fell out when the defendant tried to include additional terms on confidentiality and the tax position.

The decision

It was decided that a binding contract was entered into when the claimant accepted the defendant’s offer. Although the parties intended to then record that contract in a formal written document, execution of that document was not a precondition to the creation of a binding contract. The fact that the defendant’s letter referred to “such settlement” being recorded was a strong indication that a settlement had already been reached.

‘Subject to contract’

In this case, the letters passing between the solicitors did not contain the magic words ‘subject to contract’. The judge considered the lack of those words to be ‘significant’. However, even where the magic words are used, the question of whether or not an agreement has been reached is one of fact, to be judged objectively on the basis of the parties’ conduct and words. But if you do include those words it would be a clear indication of the absence of one of the key elements of contract formation, namely an intention to create legal relations.

So, make sure your negotiations are clearly labelled as ‘subject to contract’ until you actually intend to be bound. 

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.