Two commercial parties who intend to enter into a formal written contract can become bound by the contract even before it is signed, according to a recent high court ruling.
The court was reminded that a party would have “accepted the terms of an agreement by its conduct”, even though a contract had not yet been signed and would still require the signatures of both parties to come into force.
In the case before the court, a commercial buyer had begun the process involved with agreeing the terms of the pricing even though the purchase contracts had not yet been signed.
The buyer claimed that the contract was not yet binding because the draft contract contained “a method of communicating acceptance of the seller's offer” and that method of communicating acceptance had not been used. Therefore, the buyer argued, “there was no valid acceptance of the seller's offer” and consequently, “no contract had been formed.”
However, the judge rejected the buyer’s argument on the grounds that the use of a signature was not the only way that the contract could be accepted even though space had been provided to allow for a signature to be used, adding that there was “no ‘prescription’ that the contract could only be binding by the presence of a signature.
According to the court, even if the seller had “prescribed a way of communicating acceptance”, that method was “for the seller's benefit” and it could be waived, which had taken place. “The signatures are evidence, and no doubt, the best evidence of what had been agreed, but they are not themselves conditions of the agreement," the judge concluded.
Written terms can be accepted by ‘word of mouth’ and contract terms can be accepted ‘by conduct’, even where the written terms state clearly that a formal signature was expected and there are still terms which have not been finally agreed.
Similarly, the court would be likely to take the same view of an agreement, which specifically states as “subject to contract”. If both parties have begun to work together according to the contract terms, the court would probably consider that the “subject to contract” position had been waived.