Unsigned contracts CAN be effective

Barry Riley

A recent decision of the High Court has reiterated the fact that a written contract may be effective even if it is not signed.

The case in question revolved around a private limited company in which there are two shareholders each holding 50% of the shares.  As well as being the owners of the company, the Claimant and Defendant were also directors of it.  Under a shareholders agreement between the parties it was agreed that, if either of them were absent from work for six months or more, then they would sell their shares to the other.  The Claimant became ill and on his return to work several months later it was agreed that the shareholders agreement was effective and should be followed.

A draft agreement for the purchase of the Claimant’s shares was drawn up and the parties spent some time negotiating its terms.  Whilst the agreement was never signed on 13 January 2007, the Defendant’s agent sent an email to the Claimant referring that the Defendant was willing to purchase the shares on the terms of the draft agreement and asking the Claimant whether he accepted those terms.  On 2 February 2007 the Claimant sent a return email confirming his acceptance of the terms.

Following on from this the Defendant later claimed that he was not bound by the terms of the agreement because it was not signed.

The judge in the case had a little sympathy with the Defendant’s position making it clear that, to find in his favour, would defy commercial reality and the clear intentions of the parties as expressed in the exchange of emails between 30 January and 2 February 2007.  His reasoning was that, prior to these emails, neither party intended the agreement to be binding unless it was formally signed but that this situation changed when the exchange of emails occurred.

He considered that the appropriate view to take on assessing the circumstances were what the reasonable expectations of a sensible businessman would be and on this view concluded that a clear agreement had been reached.  Accordingly the Defendant was ordered to give effect to the agreement by purchasing the shares of the Claimant.

Practice Points

In order to avoid being caught in similar circumstances clients should, if they don’t intend to be bound by a contract, make sure all correspondence and documents are headed “subject to contract” and that they do not begin to perform a contract until the formal document is signed.

Barry Riley
briley@metcalfes.co.uk
DDI – 0117 9453 042

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s