People often discuss the terms of a contract either verbally or by correspondence such as email. In most cases, the parties anticipate that negotiations will result in a formal contract which they have signed and that, until then, there is nothing legally binding in place. A recent case highlights the risk of this assumption. A court found that, as a result of email correspondence, a shareholder had undertaken a contractual commitment to purchase his fellow shareholder's shares even though the former was expecting that this would only happen when a formal agreement was signed by both parties.
Mr Grant and Mr Bragg each held a 50% shareholding in a company of which they were both directors. Under the terms of a shareholders' agreement between them, if either became unable to work for more than 6 months because of long-term sickness, the affected shareholder would sell the shares to the other. Mr Grant became ill and was off work for a period which triggered the buy out clause in the agreement.
A share sale agreement was prepared and sent to Mr Grant. Mr Grant returned the agreement with substantial amendments. Mr Bragg did not accept the amendments and said he would not be able to complete the deal. While the negotiations of the contract were taking place, Mr Bragg began to exclude Mr Grant from the business of the company until the latter was no longer involved in the running of the business at all.
At that point, an email was sent on Mr Bragg's behalf to Mr Grant informing him that if he would accept the solicitor's original draft of the agreement (without the amendments) Mr Bragg was still willing to proceed with the purchase.
Mr Grant e-mailed Mr Bragg stating that he was now prepared to accept the original draft of the agreement and that the sale of the shares could be completed. The agreement, however, was not signed by the parties. The share sale did not complete and Mr Grant sought to enforce the share sale agreement which he contended arose through the e-mail exchange. Mr Bragg argued that, as the share sale agreement was never signed, a contract could not arise.
The court found that a legally binding agreement had come into being. It noted that, where parties were proceeding in anticipation of execution of a formal document, the normal inference was that the parties would not be contractually bound unless and until they signed that document. That inference, however, could be displaced depending on the facts. If it could be objectively ascertained that, on a balance of probabilities, the parties intended to be contractually bound immediately and not following formal execution of the document, the court would give effect to that intention.
The yardstick had to be the reasonable expectations of sensible businessmen. The judge accepted that, up until Mr Bragg's agent's email, the parties had not intended to be contractually bound unless and until the draft agreement was agreed and executed. However, the situation changed when that e-mail was sent. The email sent on behalf of Mr Bragg did not require Mr Grant formally to execute the agreement: it merely required him to accept the wording of the agreement. This was an offer which, by virtue of Mr Grant's acceptance in his reply e-mail, resulted in the parties entering into a binding contract. There was nothing that still needed to be agreed. There was no suggestion that the negotiations had at any stage been expressly or implicitly stated to be "subject to contract".
The court noted that Mr Bragg had, by his conduct, taken control of the company. He was, in effect, taking all the benefit of Mr Grant's shares without owning the shares themselves. The judge considered that it would defy commercial reality and the objective intention of the parties to say that in the circumstances of the case the parties still intended that they should not be contractually bound unless and until a document in final form that was entirely agreed was executed.
The case illustrates clearly the risk of proceeding with contractual negotiations without stating that agreement is "subject to contract". If the parties do not want to be bound by an agreement unless and until a formal legal document is executed, they should say so expressly in their communications (both written and verbal). In England, the phrase "subject to contract" is often used. In Scotland, while it may help to use this phrase, it should be noted that it does not have the legal meaning that it has in England. Accordingly, it is better to spell out the position in each communication e.g. by making clear that nothing in the communication constitutes a legal offer that is open for acceptance to create a legally binding contract.
Case name: Grant v Bragg