The Court of Appeal has provided a useful reminder on what constitutes a formed contract when engaging in contract negotiations. In the recent case of Global Asset Capital Inc v Aabar Block S.A.R.L [2017] EWCA Civ 37, the Court of Appeal justices pointed out that when negotiating a contract, any communications should be headed 'subject to contract' so as to avoid a contract being inadvertently formed on the wrong terms.
In English law, for a contract to be properly formed the 'Four Corners' need to be in place, namely; (i) an intention to create legal relations; (ii) offer; (iii) acceptance; and (iv) consideration (that is, a 'quid pro quo' or trade of something of value between the parties). If you are still in the course of negotiating a contract, it is possible for the Four Corners to be triggered without you having agreed all the relevant terms. A contract does not need to be in writing so this increases the risk of these mandatory requirements being in place inadvertently, especially if the negotiation takes place over the phone.
To safeguard against a contract being formed inadvertently in this way, the Court of Appeal emphasised the need to entitle any such communications as 'subject to contract'. This then protects the parties from a contract being formed until the terms are finalised in an agreed contract, preferably in writing signed and dated by both parties.
The Court of Appeal also confirmed that the 'whole course of negotiations' should be considered by the Court when deciding if a contract has been formed. However, if the contract terms are agreed formally between the parties then subsequent negotiations will not be taken into account.
This is an important warning, especially for sole traders and small companies, to make sure that all negotiations are entitled 'subject to contract' right up until the point where you are happy with the final terms and the contract is agreed, preferably in writing. This is especially important as once a contract is formed in English law, especially a business to business contract negotiated at 'arm's length', the validity of such a contract is difficult to challenge.
