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If a dispute arises it is for the courts to determine at what point, if at all, a legally binding contract was formed.
 
If the phrase Subject to Contract forms part of your standard day to day business negotiations then you should read on as it may not offer as much protection as was previously thought.
 
The Supreme Court (the new name for the House of Lords) has recently held that although the parties involved in a contract formation dispute had never signed a formal written agreement and the draft documents were expressed to be subject to contract, a binding agreement had nevertheless come into effect.  (RTS Flexible Systems Limited v Molkerei Alois Muller Gmbh & Co KG [2010] UKSC 14)
 
It is common practice in a lot of industries for work to commence on a contract whilst the parties are still discussing and negotiating the finer terms of their relationship.  However, under English law, a contract will be legally formed at the point where the parties reach agreement on the essential terms of the agreement, provided that both parties have the intention to create legal relations and there is some consideration.  In reality, this state can easily be achieved long before the minute details of the written documents are agreed and ready for signature.
 
If a dispute arises in such circumstances, it is for the courts to determine at what point (if at all) a legally binding contract was formed and if it was, on what terms it was formed.  Where a contract has been substantially performed there will be a strong presumption that a binding contract is in existence even where the written documentation has not yet been agreed.
 
The advice given by the Supreme Court as a result of this case is quite simply agree first and start work later!
 
If you would like any specific advice as to how to ensure that a contract is not formed prematurely or you would like to review your standard terms and conditions of business to ensure that you are suitably protected should a contract be deemed to have been formed, please do not hesitate to contact a member of Goodman Derrick LLPs

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