Is Agreeing a Price Enough to Create a Binding Contract? Not Necessarily...

Wed 16th Aug 2023

As litigators, we get involved when things have gone wrong with a transaction. Often, the starting point is to establish whether the parties have a binding contract and if so, on what terms.

Frequently there is a tension at the beginning of a business relationship between cracking on with the work and making sure that all the terms are agreed and documented in a written agreement before doing so. A common scenario is that one party produces a draft contract or puts forward their standard terms but either before that is signed or before its terms have been agreed, the parties start work and the documenting falls by the wayside.

In order to have a binding contract, each of the following ingredients need to be present:

  1. An offer by one party which is accepted by the other;
  2. Which is supported by consideration (i.e. something of value);
  3. An intention to create legal relations; and
  4. Certainty of the key terms of the proposed contract.

Whether there is a binding contract will depend on the facts of the particular case, looking at whether objectively the parties intend to contract and are agreed upon all of the terms that are regarded as essential.

This very issue has featured in two reported cases this year, where even though agreement had been reached in emails between the parties on price, the Court found that there was no valid and binding contract. Email is of course such an integral part of our business lives that the result of these cases may come as something of a surprise.

In Fenchurch Advisory Partners LLP v AA Ltd, the parties had agreed (via email) a fee structure for Fenchurch’s provision of services to the AA but they were still negotiating the terms of a detailed engagement letter, including critical terms such as the triggers for payment of a success fee and whether there should be any cap on the limits of an indemnity. The engagement letter was never signed but Fenchurch nevertheless carried out work for the AA. When the time came for payment, the AA refused to pay.

Fenchurch argued that the email exchange was sufficient to create a binding obligation to be paid their fees. The Court disagreed and held that the parties did not intend to be bound unless and until the envisaged engagement letter was signed.

That did not however mean that Fenchurch had carried out the work for nothing – they were entitled to be remunerated for the work they had done on a restitutionary basis as it would be unjust for the AA to take the benefit of the work without any payment. However, Fenchurch could not claim the lucrative success fee because there was no binding contract.

Similarly, in Smit Salvage BV and another v Luster Maritime SA and another, there was an exchange of emails in which a remuneration structure was agreed for Smit to refloat the infamous EverGiven vessel that got stuck in the Suez Canal in 2021. However, the emails also made it clear by using phrases such as “we can then start ironing out the wreck hire draft agreement so that the same can be signed at earliest” that a written agreement would be put in place. In fact, the work was completed and the boat freed before the terms of the contract had been agreed and therefore before anything had been signed.

Once again, the Court found that the exchange of emails was not sufficient to form a binding contract on the facts, meaning that Smit could instead claim their fees at a higher salvage rate than the remuneration structure set out in the email exchange.

There are some simple steps that a party can take to protect itself from getting involved in costly litigation and potentially ending up getting paid nothing or significantly less than the anticipated price for a job. Following these steps can also prevent inadvertently contracting on the other side’s standard terms (and so denying yourself the opportunity to rely on your exclusion and limitation of liability clauses, among others):

  1. Make sure that you label written negotiations as being “subject to contract” which signifies that the parties do not intend to be bound until the final written contract is signed.
  2. Resist the temptation to start work until the contract is drafted and signed.
  3. Don’t overlook any formalities for the contract in question – for example, guarantees must be in writing and signed and certain leases must be made by deed.
  4. If you intend to contract by exchange of email only, don’t refer to a written agreement or getting anything signed and obtain an email confirmation from your counterparty that they agree that the terms are as set out in the relevant email.
  5. Make sure that your standard terms are incorporated into any resulting contract by ideally attaching them to email communications or by taking reasonable steps to bring them to the attention of your counterparty before the contract is concluded (click here for our article on incorporation of standard terms).

Got any questions or have a case where you are unsure what the terms of the contact actually are? We can help with that so please do get in touch using the contact form below.

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Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.