when is there a contract?
IMMINGHAM STORAGE v CLEAR (CA) [2011]
In this case, it was decided that a contract had been made between the parties when a signed quotation was accepted and that the wording “a formal contract will follow” did not make the agreement subject to contract.
facts:
- I sent C a quotation for storage attaching its general conditions and stating that a formal contract was to follow. The quotation identified the essential terms – the parties, the product to be stored, the storage details, the duration of the proposed storage and the price.
- C confirmed it was happy to proceed based on Is quotation and accepted its terms subject to I obtaining Board approval and confirming tank availability.
- Having received the necessary internal consent, I assured C it had sufficient tank capacity and confirmed C's offer, reiterating that a full contract would be sent. I then sent a contract that it had signed for C's signature but this was not returned.
- C did not use the storage facilities. I claimed for its storage charges that would have been payable had the contract been performed but C argued that there was no contract at all, as it had not signed the formal document.
decision:
- The Court of Appeal upheld the High Court’s initial decision that a contract had been formed. The following factors pointed to the parties’ intention to create contractual relations:
- the quotation was expressly made subject to two conditions only – I’s Board approval and confirmation of tank availability, both of which had been satisfied; it was not stated to be ‘subject to contract’ or subject to execution of a formal agreement;
- all the main terms were agreed and there was no substantial difference between the quotation and the formal contract;
- I’s statement that a formal contract would follow was merely an indication that the parties’ contractual desires were to be reflected in a further document.
points to note:
- Where the parties have fulfilled agreed preconditions and do not expressly make their negotiations ‘subject to contract’, the Courts are prepared to enforce this as a binding agreement.
- In commercial negotiations the use of ‘subject to contract’ creates a strong presumption that the parties do not yet want to be bound. If this phrase is not used, parties should include other wording to ensure their agreement on the main points is non-binding, rather than create a binding but conditional contract. This case shows that when all the substantive terms have been agreed, a mere reference to a ‘formal’ agreement may not be sufficient to achieve this.
- This situation may not have occurred if there had been clearer contract wording and the parties had both had more certainty about the intended process to conclude a binding contract. Ambiguity only creates problems later down the line.