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That contract you never got round to signing? It may be binding anyway…

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Anyone who has ever done business with a contractor or supplier without having all the terms tied down should be aware of a recent case which suggests that they may, in fact, be bound by an unsigned contract.

It’s the case of Reveille Independent LLC –v- Anotech International (UK) Limited [2016] EWCA 443 which decided that the parties, by their conduct, were legally bound, despite an express term to the contrary in a draft deal memo.

The facts of the case are perhaps familiar.  Common sense might suggest that there is little risk involved in getting the ball rolling under a contract which has been substantially agreed, while the lawyers dot the I’s and cross the T’s.  But what happens when the final negotiations break down, and the parties then disagree about what, if anything, had actually been agreed?

The case concerned negotiations for a licence to allow Anotech, a UK cookware distributor, to market its products in the US under the “MasterChef” brand which was owned by Reveille.  The deal would also allow D’s products to be integrated into three episodes of the MasterChef television series.  The terms of the negotiations were set out in a deal memo prepared by Reveille.  The memo expressly stated that it was not to be binding until signed by both parties.  Anotech marked up the memo with handwritten amendments and additions, and returned a signed copy to Reveille.  Reveille never signed the revised memo, and negotiations to replace the deal memo with a long form agreement  broke down before anything could be agreed.

In the meantime the relevant episodes of MasterChef were recorded and broadcast and Anotech had started using the MasterChef brand in its sales and marketing.  Reveille duly invoiced Anotech under the terms of the licence, but the invoice was never paid.  Reveille brought proceedings against Anotech on the basis that the deal memo, as marked up and signed by Anotech, created a legally binding contract notwithstanding that it had not signed it itself.  Anotech argued that no binding contract had been concluded.

At first instance the High Court held that the parties had concluded a binding contract on the terms of the deal memo.  Anotech was ordered to pay over US$1 million to Reveille.  The question for the Court of Appeal was in what circumstances will a contract be concluded when a written offer document states that it is not binding until signed, but the offeree still appears to have performed its obligations under the unsigned agreement?

There are already established principles of English law that a party can accept contractual terms by conduct provided, objectively, that the conduct was intended to constitute acceptance and acceptance can be of an offer on the terms set out in a draft, unsigned agreement between the parties (Brogden –v- Metropolitan Railway, RTS Flexible Systems –v- Mokeroi Alois Muller GmbH).  Further, a prescribed mode of acceptance can be waived by clear, unequivocal conduct (Oceanografia SA de CA –v- DSND Subsea AS (The Botnica), MSM Consulting Ltd –v- United Republic of Tanzania).

Applying those principles, the Court of Appeal found that there was clear evidence of acceptance of the terms by Reveille by their conduct, which included integration of Anotech’s products in episodes of MasterChef and approval of use of its IP in press releases.  There was no disadvantage to Anotech when it too had acted as if it was bound by the terms of the deal memo.

The case illustrates the importance of ensuring that the terms of a contract are fully agreed, and documented, prior to commencing work.  Where work is commenced before the terms are finalised, the parties may unwittingly form a legally binding contract on the terms suggested by their conduct – regardless of whether these are the terms the parties envisaged agreeing in the formal written document.  The more significant the work undertaken the more likely the courts will be to conclude that a contract had already arisen by the conduct of the parties, even where the prescribed mode of acceptance has not been followed. 

For those parties who find themselves entering into a myriad of contractual relationships in the course of running their businesses the implications are clear.  If services are delivered before all the terms of the contract are agreed, approved and signed, there is a risk that you might be bound by terms to which you don’t agree.  The best advice is to agree all the terms, take legal advice on the implications of the contract and sign up before allowing the contract to be performed.  The lesson from Reveille is that without that, a businesses might find itself with a liability for which it hasn’t bargained.