Business contracts: best by design, not by accident

The massive disruption caused by the COVID-19 pandemic has resulted in many more people working from home resulting in the number of face-to-face business meetings to drop to virtually zero.   This has led to an explosion in the use of video conferencing technology.  Whilst the benefits of these technologies are immense, they are not without their risks.   The security risks have been well documented.  Less well documented, however, is the increased risk of parties entering into business contracts prematurely and accidentally when conducting meetings or negotiations on-line.

Under English law, a binding contract arises whenever there is:

  • a clear offer;
  • a clear acceptance;
  • an intention to create legal relations (presumed in business dealings); and
  • a mutual benefit being provided by the contract (“consideration”).

English law is more informal than other laws in that there is generally no requirement for the contract to be in writing meaning there is nothing to stop parties entering into a contract which is:

  • in a written document;
  • purely oral;
  • comprised of several different written documents (e.g. email and letters); or
  • a mixture of written documents and oral discussions.

Indeed, English courts have decided that an agreement can be inferred from the conduct of the parties.  This increases the risk that a business or individual could enter a contract on unwanted terms.

New twist to binding oral agreements

Whilst there is nothing new in principle about oral agreements being binding, the explosion in the use of Teams, Zoom and other video conferencing platforms has increased the risk of accidentally entering into an oral contract.   Now that so many video calls are recorded, providing clear evidence as to what was said by each of the parties, the age-old problem of proving that an oral contract exists (and its precise terms) is more likely to be solved.

Accordingly, when taking part in video calls, you need to ensure that enthusiasm does not lead to a binding contract being concluded on the call.  In the event of a court having to decide if a contract was formed, the test is objective: would a reasonable bystander conclude that an agreement was reached on the basis of all the words and conduct of the parties? The subjective intent of the parties is not relevant at all. 

How to avoid accidental contracts arising

Use “subject to contract”.  In any negotiations involving written communications and/or oral discussions, this phrase should be clearly stated.  Using this phrase means that:

  • the parties are still negotiating and have not yet reached an agreement; and/or
  • no legally binding agreement will arise until a formal document has been signed.

The courts have repeatedly (and recently) confirmed that the phrase provides a strong presumption against a binding contract arising.  In negotiations by video conference, you should state at the start of the call that discussions are subject to contract when the call is recorded.  Where the call is not recorded, prior to the meeting there should be an email/communication stating that negotiations are subject to contract. If you want to avoid an unwanted contact, this is the best way to do so.  But be warned, it is not a 100% guarantee as there is always a possibility that the parties later waive the subject to contract condition by their words or action, so care is needed.

Using pre-conditions/conditions precedent.  A party can also specify that some condition needs to be satisfied before a binding contract can arise.  At its simplest, it may just be that a certain person or body has to approve the draft contract or physically sign it.  Some contracts may also contain terms amounting to pre-conditions: a counterparty clause (which states that a binding contract cannot arise until each party has signed a copy of the agreement) has been seen as preventing a binding contract arising.  One potential drawback of having specified pre-conditions is that, if they have all objectively been satisfied, there is an argument that the contract has been concluded.

Use of pre-contract documents. Finally, parties can guard against a contract arising prematurely by the use of non-binding letters of intent or Heads of Terms which attempt to summarise the main points of a draft deal but making it clear that there is no binding agreement until the substantive agreement is executed. 

Action points

  1. At the start of any negotiations, refer to “subject to contract” – in writing or orally
  2. Where the negotiations are mainly oral, always try to refer to “subject to contract” in writing – and the sooner the better
  3. Set out other pre-conditions/approvals that will be necessary before a binding agreement arises
  4. Refer to the need for an agreement being drawn up and/or use of lawyers as the courts have seen this reference as making discussions impliedly subject to contract
  5. Remember that even “subject to contract” is not a total guarantee against a binding agreement arising so ensure that any later communications and conduct do not waive the need for a written agreement to be drawn up. 

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