Beware: the risk of entering into contracts, despite your intention not to

A recent Court of Appeal decision (Reveille Independent LLC v Anotech International (UK) Ltd) has highlighted the risk that an unsigned agreement may still bind parties, albeit unintentionally, even where the parties agreed that the agreement must be signed by both of them to take contractual effect.

The Issue

Any law student will tell you that the usual requirements for a binding contract are an offer, acceptance, price and an intention to create a binding legal relationship. However things are not necessarily that simple.

In this case, a cookware manufacturer, Anotech sought approval from the television producing company Reveille, to feature its range of cookware products and utensils via product placement on the US television series, "MasterChef US". Anotech had planned to pay more than $1 million for the arrangement and the parties produced a Deal Memorandum. The Memo was due to be superseded by a formal long form agreement (which was never produced) and stated that it would not be binding unless signed by both parties.

Despite the fact that the Deal Memo was only ever signed by one party, the parties proceeded to act as if the contract was in place. But negotiations for the long form agreement broke down and the relationship deteriorated. Anotech refused to make payment on the basis that there was no binding contract as the Deal Memo did not comply with formalities (not having been signed by both parties).

The Court had no difficulty in finding that a contract was in place between the parties as reflected by their conduct which had acted as a waiver of the formal requirements of the Deal Memo.

Relevance to all business

This case highlights the importance for parties to consider their conduct when negotiating agreements and to try and ensure certainty of contractual relations, given that a contract can come into force without the parties necessarily intending it to.

Parties should consider taking the following steps when negotiating an agreement:

  1. Where parties are still negotiating the terms of an agreement, the use of the terminology "subject to contract" in documents and emails discussing the contents of an agreement is helpful to indicate that you do not intend to be bound by the contents of the document.
  2. Ensure that finalised contracts are signed by both parties and a copy of the signed contract is kept.

Parties should not assume, however, that because a contract is not signed, it is not legally binding. Even in circumstances where an agreement purports to require a signature to be binding, the conduct of the parties can be taken into account by a Court to determine whether a contract has come into existence.

The issue is equally relevant in relation to amendments to existing contracts – again the conduct of parties may result in a contract being varied despite non-compliance with formal requirements.

To learn more on this matter, please contact me on +44 (0)117 915 613 or [email protected]