'Subject to contract' - when do you have a contract?

Out-Law Guide | 16 Aug 2011 | 10:55 am | 2 min. read

This guide was last updated in August 2011.

The issue of when a valid contract is formed can be a complex one. Courts will often say that a valid contract exists based on intentions of the parties, even when no formal paperwork has been signed. Technology has also complicated the contract-formation process. Emails are often considered to be an informal means of communication, but the courts have shown that it is possible to enter into a binding contract through the exchange of emails.

The Immingham Storage Company case

This was exactly what happened in a court case between petrol storage company the Immingham Storage Company and commodities trader Clear Plc.

In 2011 the Court of Appeal decided that the use of the phrase "our full contract... will now be raised... and sent for your signature" as part of a series of emails created a contract between the two companies. Even though this full contract was never completed or returned, the court considered that there had been an intention to create contractual relations and a binding contract existed.

The series of emails concerned the availability and cost of a petrol storage facility. Immingham sent an email quotation which provided that a formal contract would follow in due course and attached its general conditions. Its customer, Clear, confirmed that it wished to proceed and faxed back a signed copy of the quotation. The storage company accepted this offer by emailing a 'contract confirmation', stating that the full contract would follow for signature and return. Although this document was sent, the customer did not sign or return it.

Clear was unable to source appropriate fuel and never made use of the storage facility. Immingham invoiced it for storage charges and brought a claim for non-payment. Clear denied that there was any binding contract as it had not signed the formal document.

The judge who first heard the case found that a contract was formed by virtue of the email exchange. The Court of Appeal agreed, stating that signing the contract was merely a description of how the transaction, which had already been agreed, would go through and not a condition of the transaction itself. The only conditions which had to be satisfied were Clear's obtaining board approval and confirmation that a tank was available - both of these had been satisfied before Clear accepted the storage company's offer. Phrases such as 'subject to contract' had not been used and the terms on which the quotation was signed - 'subject to your board approval' - made it obvious the conditions that had to be satisfied.

The statement that a 'formal contract will then follow' was just an expression of the parties' wishes and the email referring to the formal contract did not change any of the terms of Immingham's offer. This reference had to be read in the context of the entire email, which strongly supported the impression that the contract had already been formed.

Implications for contractors

If your business is involved in procurement:

  • when negotiating a contract, be aware that reference to an additional formal agreement being necessary may not be sufficient to class those negotiations as a non-binding pre-agreement if the main terms have otherwise all been agreed;
  • use of the phrase 'subject to contract' in commercial negotiations creates a strong presumption that the parties do not want to be bound yet. Make it clear if your agreement on the main terms is only intended to form a non-binding pre-agreement, rather than a binding but conditional agreement.

If your business is involved in claims or dispute resolution:

  • in assessing the existence or terms of a contract, carefully consider all the communications and circumstances and the extent to which the main terms have been agreed - irrespective of the informality of that agreement.

Although this case involved a relatively simple contract, the decision illustrates the risk that a vague reference to a formal agreement may not be enough to achieve a non-binding pre-agreement when the main terms are all agreed. The word 'formal' may even be taken to indicate that any further agreement is a mere formality, and that the substance of the contract has already been agreed.