Though not best practice, it is not uncommon for parties to begin to perform duties under a contract before it is signed. When this situation arises, the question is what terms, if any, are the parties bound by?
The starting point when considering the answer to this question will be clarifying the stage which the contract or negotiations reached before the parties began performance. This is of course, a highly fact specific question and will vary in each instance. Below we run through the principles to consider and apply them to some different, though not exhaustive, examples of parties proceeding without signed terms.
A recap of the law
The starting point is that until a contract is concluded (in accordance with the principles of English law) the English courts will maintain that either party is free to decide not to contract or to withdraw without incurring liability.
English law requires that for a contract to be formed there must be an offer, that is accepted, with consideration passing, an intention to create legal relations and on certain terms. In the event of a dispute as to when a contract was formed, or if it was formed at all, the court is concerned with finding out if those elements are satisfied. A signed document may be good evidence of that, but it's by no means the only way terms can be found to bind.
In fact, a written document is not (with some limited
exceptions) a pre-
requisite to a legal binding contract at all. It's merely one
way a contract can be formed under English law, which also
recognises contracts formed orally or via conduct.
We will now turn to several scenarios to assess the likely legal position and the considerations of the courts.
Contract terms are final and parties begin performance without having signed
If the only thing missing from a fully negotiated contract is the signature and date but the parties begin to work together in accordance with the terms, the court may well conclude that the contract applies in full and is binding. From the contract, the court should have everything it needs to identify the offer, consideration and certainty of terms. The two points that might be challenged are the fact of acceptance and an intention to create legal relations. English law permits acceptance either expressly or via conduct. That is a wide remit and a pragmatic approach will be taken by the court, looking at all the evidence. So, if the parties fulfil their duties under the contract and in accordance with the agreed terms, that is likely to suffice for acceptance. Such conduct will also satisfy the requirement for intention to create legal relations. Of course, one party cannot typically use its own performance to bind the other, without more. Acceptance is the final and unqualified expression of assent to the terms of the offer. For the offeree to have accepted, it must therefore be clear that the offeree acted as it did in response with the intention of accepting the offer. Generally an offeree will not be bound by an offer if they do nothing in response, although if the silence of the offeree demonstrates unambiguously, in the circumstances, an intention to be bound, this could be sufficient.
Both sides have put forward their own contracts, with neither signed
A more adversarial scenario than the above, if the parties didn't negotiate terms and end up with a final draft but instead put forward their own respective terms, which neither signed or otherwise expressly Unsigned contracts prior to performance accepted, you'll be in the remit of the "last shot" doctrine. Here, if conflicting terms have been exchanged, each is considered a counteroffer. If, following receipt of the last set of terms exchanged, the parties started performing the contract then, absent any subsequent negotiation on terms or conduct indicating that they intended other terms to apply, that performance may be considered acceptance by conduct of the final set of terms in the series. It could also be the case, depending on the facts, that a contract is formed, but neither party's terms apply. Of course, if there is no evidence of any acceptance, then no contract will be formed.
As indicated, the last shot doctrine can be displaced by the evidence of the parties' objective intention that the "last shot" shouldn't prevail – for example, if the parties' performance follows the terms of the earlier document in the series. It is also possible that the terms of an earlier contract may expressly prevent the possibility of it being varied or overruled by later terms unless a variation is expressly agreed by both parties in writing and signed – for example, a master services agreement that is signed by both parties, which clearly states its terms will prevail will likely bind in place of general wording at the bottom of an invoice that says, "delivery based on our general conditions of sale".
Heads of Terms ("HoTs") / Memorandum of Understanding ("MoU")
A more nuanced situation is where parties exchange HoTs, a MoU, letter of intent, heads of agreement, etc, but failed to further negotiate the details of those terms or finalise the anticipated contract. In the event of a dispute, the court will strive to determine what terms apply, if any.
The legal effect of these types of document will depend on their content and on the intention of the parties. The principles above governing whether or not a contract has been concluded will apply. As above, if the parties start performing in accordance with the HOTs/MOU, a court may be able to find a contract has been concluded via conduct on the terms set out. Markings such as "subject to contract" will provide a strong indication that the parties did not intend to be bound. However, the court will look at all of the circumstances and the relevant context to assess the actual content of any agreement and can still conclude that the parties intended to be bound if there is evidence of such and all of the contractual formation requirements are satisfied.
Whether terms in these types of 'interim' documents are binding is highly fact specific. A consistent factor is that a party takes on significant risk by commencing performance on the basis of HoT/a MoU alone.
What if no terms are apparent?
Though it might appear there are no terms, the reality is parties will not have begun performance in a complete vacuum and, therefore, there will be some frame of reference for the court to start from in the event of a dispute - even if it's as simple as oral commitments, email communications or a limited HoT. If the court is satisfied that all the requirements for contractual formation are present from those references then there can still be a binding agreement.
As stated at the start, these situations are not exhaustive – there are many other scenarios where parties engage with each other without the applicable terms being clear. Each situation will need to be considered on its facts and in the relevant context to evaluate whether or not a contract has been formed and, if so, on what terms.
Our glossary of key terms referenced in this guide
For ease of reference, we have summarised some key terms referenced in this guide. Click on the links to where these terms are discussed for context and guidance.
Heads of terms: (Also referred to as letters of intent, memorandum of understanding or heads of agreement.) Usually a short document setting out the main terms of a transaction, the details of which is then negotiated between the parties. Heads of terms can be fully or partially binding, or not legally binding at all.
This piece forms part of our Contract Interpretation guide. The guide compiled by our Dispute Resolution team and looks at the meaning of some commonly used, but also commonly litigated, contractual terms. To view the full guide click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.