The Court of Appeal has recently considered whether an e-mail exchange, which included the phrase “a formal contract will follow” was subject to contract.
The phrase “subject to contract” in commercial negotiations creates a strong presumption that the parties do not yet want to be bound. Parties who do not use this wording need to make it clear if their agreement on the main points is a non-binding pre-agreement, rather than a binding but conditional agreement.
This recent decision (Immingham Storage Company Ltd v Clear plc  EWCA Civ 89) illustrates the risk that a vague reference to a formal agreement may not be enough to achieve this when the main terms are all agreed. The word “formal” may even indicate that any further agreement is a mere formality, as the substance has already been agreed.
In every contract negotiation it is a question of fact at what point, if at all, the parties have the necessary intention to enter contractual relations. One of the key indicators, though not conclusive, is whether the parties have marked their written offers “subject to contract”. Where negotiations are not made subject to contract, and all essential terms are agreed, a binding agreement may well have been made, even if the parties envisaged the subsequent preparation of a formal written contract. (A contract cannot, of course, exist without agreement on all essential terms).
In this case the claimant, a storage company, provided storage facilities and the defendant, a customer, was a commodity trader. The parties exchanged a series of e-mails over a proposed contract to store diesel fuel at the claimant’s depot.
The claimant sent, via e-mail setting a deadline of 3 January 2009, a quotation headed “Subject to board approval and tankage availability”, which identified the parties, the product to be stored, the type and capacity of storage, method of handling, start date, duration and price. The quotation also said “All other terms will be as our General Storage Conditions, Version 2008″ and ended with “A formal contract will then follow in due course.” The quotation was signed by the storage company and above the space for the customer’s signature were the words “we hereby accept the terms of your quotation subject to your Board approval”.
On 5 January, the defendant signed the quotation and faxed this to the claimant, who then confirmed receipt via e-mail and stated “We will now seek both our own internal Board Approval to proceed, along with availability of the necessary capacity and expect to be reverting to you by end of the week latest, so as to confirm (subject to the foregoing) all aspects of our new contract together”.
On 9 January, the claimant e-mailed the defendant, stating “We are delighted to be able to accept your offer … you are assured of [storage] and can now proceed to source your product accordingly … in further confirmation of the above, our full contract for this business will now be raised over the next few days by our Head Office and sent for your signature and return”.
The formal agreement (that is, “our full contract”) was sent out to the defendant but never completed or returned, and the defendant did not use the storage facilities. When invoiced by the claimant for storage charges, the defendant denied there was any binding contract, since it had not signed the formal agreement.
At first instance, the judge held there was a binding contract on 9 January. The defendant then appealed to the Court of Appeal, arguing that a communication which expressly refers to a full contract to follow cannot be a complete acceptance of terms already offered.
The claimant argued that a contract was made by the acceptance – in its e-mail of 9 January – of an offer made by the defendant and constituted by the return of 5 January 2009 of the quotation duly signed by (or on behalf of) the defendant.
The Court of Appeal held that three factors pointed overwhelmingly to an intention to create contractual relations, namely:
1. the quotation (and other negotiations) were not expressly made subject to contract;
2. the quotation was expressly made subject to two other conditions (board approval and confirmation of tank availability), which had been fulfilled by the claimant; and
3. all substantial terms were agreed, and there was no substantial difference between the quotation and the formal contract.
Set against these factors, the provision that a “formal contract would then follow in due course” did not indicate that the claimant’s acceptance of the signed quotation would be no more than an agreement subject to contract.
This case, applying existing law to established facts, shows the courts’ willingness to enforce an agreement made informally, where the parties have fulfilled agreed preconditions and did not expressly make their negotiations subject to contract.
The phrase “subject to contract” in commercial negotiations creates a strong (but not conclusive) presumption that the parties do not yet want to be bound. Parties who do not use this formula should therefore include alternative wording that makes it clear their agreement on the main points is a non-binding pre-agreement, rather than a binding but conditional agreement. This decision illustrates the risk that a vague reference to a “formal agreement” may not be enough to achieve this when the main terms are all agreed.
The word “formal” may even indicate that any further agreement is a mere formality, as the substance has already been agreed.
It is imperative to take care when setting out in writing all negotiations, and – if your intention is not to create a binding contract – then the documents containing the negotiations should make that explicitly clear by, at the very least, including the words “subject to contract”.