Watch your words

By Gwendoline Davies, February, 13 2014,

Gwendoline Davies, Walker Morris

Gwendoline Davies is head of litigation and dispute resolution at Walker Morris

Suppliers and purchasers often transact by email – particularly in fast-paced, price-sensitive industries where materials need to be sourced quickly. Care is needed in negotiating such deals as it is all too easy to become inadvertently bound in contract.

If there’s a dispute about whether a contract has been formed, a court will consider how you conducted yourself and the words you used in negotiation to assess whether you intended to create a binding contract and agreed all the key terms.

Your behaviour and the language you use are therefore very important. Bear in mind that there need not be a signed contract – nor agreement on every term – for a binding contract to be created. Lesser details can be agreed later.

In a recent case, Proton Energy Group v Orlen Lietuva the court found the parties’ email negotiations amounted to an enforceable contract. Although there still remained important points to agree on, the defendant found itself locked into an unwanted contract.

Here are some tips on how to avoid that scenario:

• Make clear you do not intend to be contractually bound by your discussions until a formal contract is signed. Use the words ‘subject to contract’ in all your negotiations – whether in meetings, telephone calls or in written correspondence

•  Confirm oral negotiations in writing and mark correspondence ‘subject to contract’

•  Do not use ‘the language of commitment’ (as the judge cited in the Proton case) until you are ready to enter into a contract. Such language might indicate an intention to be legally bound, for example:

• Certain, obvious words can indicate that a party intends to be bound (I accept/confirm/agree) – but other, more colloquial, less formal words can also be construed as agreement, such as ‘that sounds fine’ or ‘I can do that’

• Take care in how you respond to questions such as ‘do you accept/agree?’ Affirmative responses will evidence agreement

• Do note simply using the words ‘subject to contract’ at the top of an email or letter won’t necessarily stop a contract coming into place if all the other signs point to the parties having intended to enter a contract at that point (as in the case Jirehouse Capital & Others v Beller & Another)

• Regulate your conduct and that of your team to ensure it is consistent with there being no intention to be bound in contract. If you do not intend to be legally bound; do not act upon the proposed terms under negotiation; do not let your team engage in administrative action connected to the carrying out of the terms (such as requisitioning a haulage facility to carry the goods under negotiation to the buyer)

• If in doubt about your actions, ask yourself: “Would an objective third party watching me do or say this, think I was intending to be bound by the contract?

• If negotiations need to be concluded urgently, use extra care to emphasise they are subject to contract and that you will not be legally bound at this stage.

Don’t be caught out. Choose your words and actions carefully throughout negotiations to ensure you only become legally bound when you are ready to contract.

Gwendoline Davies is head of litigation and dispute resolution at Walker Morris

When negotiating with a supplier, take care not to enter unwittingly into a contract before you are ready.