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The three little words that every lawyer wants to hear

No, we don’t expect our clients to tell us they love us!  But we do love it when clients use “subject to contract” in their negotiations.

A recent case in the UK Court of Appeal, Immingham Storage Co Ltd v Clear plc, highlights the court’s willingness to enforce a contract where all essential terms have been agreed, and where the negotiations leading up to the contract were not made under the “subject to contract” banner.

Clear plc, the customer, had enquired about the use of storage space at Immingham’s storage facilities, to which Immingham responded by e-mail providing a quote for a 12 month storage period, and attached its general terms and conditions.  The Immingham quotation was headed “subject to board approval and tank availability”, and further provided that its formal contract would follow in due course.  Clear confirmed that it wished to proceed and faxed back a signed copy of the quotation.  A few days later, Immingham sent a “contract confirmation” e-mail and stated that it accepted Clear’s offer and a full contract would be sent to Clear for signature.  The formal agreement was sent out to Clear but it was never completed and returned, and Clear never did use Immingham’s storage facility.  When Immingham invoiced Clear for the storage charges, Clear denied that there was a binding contract as it had not signed any formal documentation, and so refused to pay.

The Court of Appeal held that a binding contract was concluded by Immingham’s “contract confirmation” email.  The initial quotation signed by Clear was an offer that was accepted by Immingham.  There were three factors which pointed to an intention to create contractual relations:

  • the quotation was not expressly made subject to contract or subject to execution of a formal agreement;
  • the quotation was expressly made subject to two other conditions (being board approval and confirmation of tank availability), both of which had been fulfilled; and
  • all substantial terms had been agreed, and there was no real difference between the quotation and the formal contract.

This decision makes it clear that the courts will be willing to enforce an agreement made, however informal, if the parties have not made any of their negotiations “subject to contract”.  The phrase “subject to contract” is routinely used in property transactions, but should also be used in commercial negotiations, where it creates a very strong presumption that parties are not yet intending to be legally bound.

The case is a clear reminder of the need to use the phrase “subject to contract” or something similar in e-mails or even verbally when discussing commercial terms which are intended only to be binding once a formal contract is signed.

For further information please contact Eddie Powell, Partner, Fladgate LLP on +44 (0)20 3036 7362 or epowell@fladgate.com