Does your business operate within an industry where it is common for parties to start performing a contract before its final terms are agreed? If the answer to that question is “yes”, a number of recent Court decisions might prove significant during contractual negotiations and completion:

Counterparts Clause

The Court of Appeal has held that a counterparts clause (a clause which is traditionally included in written agreements to allow the parties to execute separate copies of the agreement) within a draft agreement prevented a contract coming into existence, even though the parties had already performed a central part of the contract.  Many commercial agreements include such a clause because it is not always practicable for each party to a contract to be present at the same physical location for completion.

The Court said that a counterparts clause showed a continuing requirement that a contract would only come into existence if a written agreement was entered into. A commercial party may not expect, nor indeed intend, that the inclusion of such a clause could prevent a contract from coming into existence until after the agreement has been signed, especially if the parties have reached agreement on the terms and carried out the contract.

The Court’s decision, if followed, is likely to make it more difficult for suppliers in industries where it is common for parties to operate on the basis of letters of intent or unsigned agreements to establish the existence of a contract in the event of a dispute. With that in mind, we would suggest that a counterparts clause should not be drafted into an agreement, as a matter of routine, during the contract negotiation stage.

Telephone Conversations and Emails

Courts frequently find themselves faced with the situation where informal telephone conversations and e-mail exchanges are being relied upon by a party to establish a binding contract.  Although cases tend to be fact specific, where parties operate on the basis of telephone conversations or e-mails, it is advisable to confirm important communications in writing and to ensure that any contractual terms are recorded in a document signed by both parties, even if they have been doing business together for some time.  Where a party wants to avoid the possibility of being bound by informal exchanges, it is useful to make it clear that e-mails are not intended to create legal relations which can be done by including the phrase “subject to contract” in the body of the e-mail.

If you require further information on anything covered in this item, please contact a member of the Commercial Team.