Things are not always what they seem. Sometimes, what appears to be an agreement is not in fact binding. On the other hand, a binding agreement can be made without the parties realising it. So, when do you have a binding contract?
A contract is formed when the parties have agreed on its essential terms. There are no particular formalities required to create a binding contract. It is possible to create a contract orally or by conduct, as well as in writing.
A formal agreement is not always required. The parties may agree terms with the intention of preparing a formal document at a later date and it is often assumed that there is no binding agreement until then. That may not be the case. The Court will look at the parties’ words and conduct to determine whether it was intended they would be bound immediately or only after preparation of a formal document. Marking correspondence as ‘subject to contract’ will give an indication that the parties do not intend to create a binding contract.
Sometimes parties will agree ‘heads of terms’ or ‘heads of agreement’ as a pre-cursor to a full written agreement. Generally, these documents are not intended to be binding but the Court may find that the parties did intend to be bound based on their words and conduct. Again, using the ‘subject to contract’ label will assist in demonstrating that the document is not intended to be legally binding until a formal agreement is prepared.
It is common for parties to agree terms ‘subject to contract’ and then begin performing their obligations before a formal contract is in place. It can then be unclear whether the parties are acting on terms set out in pre-contract documentation; whether a contract has been concluded on more limited terms; or whether there is a binding contract at all. The outcome will depend on the particular facts of the matter.
It may be that the parties have entered into a binding agreement, but that the terms are incomplete or it is too uncertain to be enforced. In those circumstances, the Court may find that there is no binding contract because the obligations are too uncertain and there is simply no way to determine what obligations the parties have.
In order to be enforceable, an agreement requires ‘consideration’ to be provided by both parties. This is usually some form or payment or value. Where the obligations of one party are not sufficient to amount to consideration, payment may need to be made. It may also be necessary to have an agreement in the form of a deed.
- Remember a contract can be made by email, orally or by conduct
- Ensure all obligations under the contract are clearly defined
- If it is necessary to start work earlier, ensure all key matters are agreed first
- Ensure written agreements are signed by all parties
- Mark all correspondence ‘subject to contract’