Not every agreement will be enforced by a Court.
To be binding the parties must have what is known as an ‘intention to create legal relations’.
One aspect of this rule relates to when negotiating parties intend to be bound by the terms they have negotiated.
There are 4 categories:
The parties have reached finality in agreeing all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect.
In this case (which is the most common) there is a binding contract. The contract binds the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document.
The parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.
In this case there is also a binding contract. The contract binds the parties to join in bringing the formal contract into existence and then to perform it.
The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
In this case there is no binding contract. The parties do not intend the terms of their agreement to have any binding effect of their own. The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into a formal contract, or simply because they wish to reserve to themselves a right to withdraw at any time until a formal contract is signed.
The parties intend to be bound immediately by the terms they have agreed, but expect to make a further contract in substitution for the first contract which contains, by consent, additional terms.
In this case there is also a binding contract, whether or not a further contract is negotiated or executed.
The use of the words ‘subject to contract’ during negotiations will raise a strong presumption that the parties do not intend to be bound until a formal contract is executed.
In contrast, the use of words during negotiations which indicate an intention to be immediately bound are likely to be held as evidence which supports the existence of a legally enforceable contract.
Disputes often arise where the parties do not make it clear whether agreed terms are legally enforceable, for example in a ‘heads of agreement’.
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