30/09/2014

By Keith Lewington, Company and Commercial Lawyer, Excello Law


Businesses enter into contracts all day, every day and the vast majority of them run smoothly. The goods or services are delivered, the buyer pays and everyone is happy. In some cases however, there can be disagreement over whether or not a contract exists at all and when exactly the contract came into existence. This is an area where small businesses need to take care.

If you work with contracts that are based on standard terms but are usually negotiated with the customer, agreed and formally signed off, life seems fairly straightforward. Even so, it’s important not to forget that a contract does not have to be in writing and does not need a pen and ink signature to be a legally binding agreement. The agreement becomes legally binding as soon as there is evidence that the parties have reached an agreement. In the era of modern communications, the courts are now quite happy to look back through an email chain to find evidence that all the points the parties were discussing have been agreed, and as soon as that happens, there is a contract. Even in those very rare cases where English law requires the contract to be in writing, an email sent by a named, responsible individual from one of the parties is as good as a signature and the notion that all the terms have to be gathered together in one document and “signed” (in the traditional sense) no longer applies.

So how do you avoid entering into a contract by mistake? When things are getting near to a conclusion, you should always incorporate some form of words saying that the exchanges are not meant to be legally binding and will not become legally binding until there is a formal “signed” contract. The usual way of saying that is to use the time-honoured expression “subject to contract”, but even then there are “but’s”. The words must be consistently used in the correspondence. Two firms of solicitors recently agreed the terms on which an employment dispute would be settled. They also agreed that the settlement would be “recorded in a suitably worded agreement”, but forgot to say in so many words that everything was still “subject to contract”: the court held that they had agreed the terms and, although they intended to set them out in different words, the terms that had been agreed at that point were final.

The same problems arise with the classic situation where the customer wants it done by the end of the month so “We’ll get the legals sorted…just get on with it and keep the customer happy.” So, if the legals are not sorted, have you got a contract, or half a contract or no contract at all? In the leading case on the point, the High Court reached a decision on its interpretation of the facts, the Court of Appeal overruled the decision and then the Supreme Court told both of them they had got it wrong. All three courts agreed that the ultimate decision depended on the particular facts of the case, but the three completely different decisions make it clear that you won’t know what your legal position is until the Supreme Court has ruled – several thousands of pounds later!

Does not agreeing the small print matter? Probably, for one side or the other. You agreed the description of the goods or services and you agreed the price and the delivery date. Did the email chain go on to discuss what warranties were (or weren’t) being given? What limitations there were on the seller’s liabilities? What the payment terms were? What the consequences of delay were? What rights the buyer had to change or cancel their order? The basics of a contract are often comparatively easy to agree, but they are only a starting point, and no sensible business would leave itself without the protection of the key terms in a supply contract. That means everyone taking great care to make sure that all the terms and conditions have been proposed and accepted before the agreement is deemed to be final and not starting work until they have been.