Traditionally contracts are entered into between parties by them both signing the agreed terms of the contract or each signing counterparts of the agreed contract. However, now more than ever, most communication is conducted via email and questions arise as to whether contracts can be formed by other methods, including emails.
In this article we will consider:
- The extent to which a contract can be formed via email; and
- the impact which the use of the phrase “subject to contract” can have during contract negotiations and its importance.
In the absence of the wording “subject to contract”, can a contract be created by email?
In Golden Ocean Group Limited v Salgaocar Mining Industries PVT Ltd [2012], the courts held that a guarantee that had to comply with section 4 Statute of Frauds 1677, which required the contract to be in writing and signed, could potentially be created by an exchange of emails. The judge indicated that something as simple as putting your name at the end of an email could amount to a “signature” for legal purposes if the email shows an intention to be bound by certain terms.
This case emphasised the importance of a few things:
- business practices are evolving and emails are not the informal method of communication that they are sometimes perceived to be; they can be as legally binding as a formal written contract; and
- companies need to be aware of all communications made on transactions – if there is no intention to be bound by an email communication that is made on behalf of a company, it must be clear in the communication by stating clearly that the communications are “subject to contract”.
- Given the risks of companies being bound to contracts as a result of email communications, it is important to train members of staff to be careful about what they are sending and to be alive to the potential risks.
Does the phrase “subject to contract” always provide protection?
The courts have in the past stressed the significance of using the actual words “subject to contract” rather than using wording to that effect. For example, in the case of Immingham Storage Company Ltd v Clear plc, the Court of Appeal decided that the use of the phrase “our full contract… will now be raised… and sent for your signature” as part of a series of emails created a contract between the two companies. Even though a full contract was never completed, the court concluded that there had been an intention to create contractual relations and a binding contract existed. The courts judgement also made it clear that using the wording “formal contract will then follow” was just an expression of the parties’ wishes and that this reference had to be read in the context of the entire email, which strongly supported the impression that the contract had already been formed.
Businesses should bear in mind that the phrase “subject to contract” in commercial negotiations only creates a strong presumption that the parties do not wish to create legal relations (i.e. do not intend to be bound by a formal contract) and it is not definitive. When considering whether a contract has been created, the court will assess all the facts and ask whether a reasonable person would regard it as such (an objective test).
However, the “subject to contract” shield can fail in limited circumstances. For example, this phrase will not protect parties from being bound if the surrounding circumstances show a contrary intention such as where the parties start to perform the contract before the formal agreement is signed. In this instance, the courts are strongly inclined to come to the conclusion that the “subject to contract” reservation” has been waived or lifted.
Even in situations where the parties have not started to perform the contract, businesses should still consider whether there is anything within the email correspondence which is inconsistent with the “subject to contract” wording. For example, a salesperson may forget the presence of a standard “subject to contract” notice in emails and say something inconsistent with this such as “now that we have reached an agreement” or “we have a deal”. Whilst this evidence may not be enough in itself to rebut the presumption that the parties do not intend to create legally binding relations, there will invariably be a risk in these circumstances that the parties’ substantive messages had impliedly lifted the “subject to contract” reservation.
When using a “subject to contract” statement in an email footer, business risk this wording:
- not coming to the addressee’s attention;
- being left on emails by mistake in situations where there is an intention to create a contract; or
- not covering documents attached to the email where the “subject to contract” wording was intended to apply.
What is clear therefore is that the use of “subject to contract” is not an absolute guarantee that communications or actions will not result in a binding contract coming into existence. Therefore, businesses still need to be extremely careful when communicating to ensure that they aren’t inadvertently binding themselves to a contract or terms and conditions if this is not the intention. Again, training of staff is crucial to ensure that they understand the risks and pitfalls and how to avoid issues arising.
How can we help?
Whatever cautious steps parties take to avoid entering into contractual relations, such as including the wording “subject to contract” or omitting to sign final form documents, the courts will look at all the communications between the parties when deciding whether a contract has been concluded. For strategic advice on how to avoid inadvertently entering into contractual relations please contact Mark Chapman or Cesare McArdle on 01276 686222 or via email: mark.chapman@herrington-carmichael.com or Cesare.Mcardle@herrington-carmichael.com.
