Commercial Contracts: are oral discussions binding?

Commercial Contracts: are oral discussions binding?

Negotiations are a vital part of the process of agreeing the terms of a commercial contract, but when will such discussions have a binding effect on the parties?  At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and terms.

The High Court in the UK (whose rulings have persuasive effect on the courts in The Bahamas) has ruled that oral discussions which took place and resulted in non-binding heads of terms did not amount to a legally binding agreement.

What’s the background?

In this case, oral discussions took place in relation to the the supply of services by the claimant (a supplier of specialist services to the financial services industry) to the defendant (a broker in the financial services industry). 

The claimant argued that it had entered into a legally binding agreement to provide "middle office support" for 24 months.  However, the defendant denied a binding agreement had been reached.

Discussions took place, and the claimant sent an emailed proposal to the defendant.  A few weeks later, a meeting took place where representatives of both parties went through the proposal in detail.  There were no changes made (aside from the date on which the engagement was to commence) and handshakes followed.  A few days later, the claimant emailed the defendant stating:

"I have set out below the terms … agreed in the meeting … on Tuesday [1]3[th]. … I am happy to sign whatever additional documents ICAP requires to record this agreement."

The terms referred to included various services the claimant would provide the defendant with, at a monthly fee of £50,000 plus VAT and £2 million of credit for facilitation fees annually.   At issue was whether or not a legally binding agreement had been reached at, or immediately after the actual meeting took place.

The High Court made clear that whether or not the parties intended to create legal relations and agreed all the essential terms depended on an objective examination of the parties' words and conduct.

On the facts, particularly that a representative of the defendant had, at the meeting, challenged the claimant’s representative’s statement that the parties were ‘done’, it was clear to the objective observer that although all points had essentially been agreed, the stage of a legally binding agreement had not been reached.  There was not even a written agreement between the parties, or an acceptance of emailed proposals.

The court ruled: “On the evidence, at no stage had the parties contemplated, or appeared to contemplate, that a legally binding agreement would be entered into orally” Even the suggestion of celebratory drinks was not considered evidence.  The judge said: “There was something to be celebrated - an agreement in principle would be a fair description - but that did not mean that the stage of a legally binding agreement had been reached.

What does this mean?

Great care must be taken when negotiating commercial contract terms.  This includes understanding when there is an intention, in law, to create a binding contract – or whether those negotiations remain subject to contracts.  You should resist working on the assumption (or hope) that a binding agreement has been reached.

How can we help?

For expert, incisive legal advice on your commercial contracts, call the experienced commercial lawyers at ParrisWhittaker.  If you are considering or negotiating new contract terms, we can help you with clear, effective drafting of commercial contract terms to fully protect your interests.  We will advise you on when your agreements are legally binding.

1JAS Financial Products LLP v ICAP Plc [2016] EWHC 591 (Comm)