In business, deals often move quickly. Heads of terms are circulated, emails confirm agreement, and work may even begin before documents are signed. But one of the most common – and costly – misunderstandings is assuming that an agreement in principle is the same as a legally binding contract.
“Difficult disputes often arise when parties believe they’re commercially aligned but haven’t clarified their legal position” – Andrew Campbell, Partner, Allsopp Campbell Rainey.
What is a binding contract?
Under Northern Ireland law, a contract is generally formed when there is:
- an offer (one party proposes terms),
- acceptance of the offer
- consideration, meaning something being paid as a ‘price’
- an intention to create legal relations (this is usually apparent)
In practice, whether those elements exist is not always obvious. Emails, draft agreements, and heads of terms can sometimes amount to a binding contract if the components above are all present– but often they do not.
The role of “subject to contract”
The phrase ‘subject to contract’ is particularly important. Its purpose is to make clear that, despite commercial agreement, the parties do not intend to be legally bound until formal contracts are executed.
Where this wording is used consistently, it can provide strong protection. Where it is omitted, diluted, or contradicted by conduct – for example, starting work or making payments – the legal position can quickly become blurred.
Where disputes commonly arise
Problems tend to surface when the following situation arises:
- One party believes a deal is final and acts on that basis while the other believes negotiations are ongoing; and
- Circumstances change, and one side seeks to walk away.
At that point, at Allsopp Campbell Rainey, we find pragmatism may win, and the parties want to preserve the relationship and will work together to find a solution.
Other times, commercially the stakes are high and trump the importance of the relationship, or the relationships are already frayed, and so the question becomes whether a contract was already formed – and if so, on what terms. These disputes are rarely straightforward and often hinge on small details in correspondence and behaviour.
Neil Allsopp, Partner, Allsopp Campbell Rainey says: “Disputes often arise not over the commercial deal, but because parties fail to agree when – or whether – they are legally bound.”
Practical steps to reduce risk
Businesses can significantly reduce the risk of dispute by:
- clearly marking negotiations and documents as “subject to contract” where appropriate
- avoiding mixed messages in emails and meetings. The trick here is to apply the most cynical interpretation to what you are expressing, as an opposing lawyer will do. Easier said than done!
- resisting pressure to commence work before contracts are signed, unless you have a specific clause saying ‘if you start work before this is signed, you are deemed to have accepted its terms’, which can help form the argument.
- taking early legal advice on deal structure and documentation.
Clarity at the outset is often far less costly than resolving a dispute later.
Finalising a business deal? Expert advice is essential. Contact Andrew Campbell, Neil Allsopp, or anyone at the Allsopp Campbell Rainey team.