Simple ways to avoid costly mistakes:
Bound by an Unsigned Contract

Many costly legal disputes arise out of basic contractual mistakes. In most cases simple steps can be taken to avoid these costly contractual mistakes. In this article we look at the issues surrounding unsigned commercial contracts.

Some businesses may assume they cannot be bound by a contract's terms until they sign. But this may not be the case if the conduct of the parties suggests otherwise, as emerged in a recent case, which developed into a costly dispute, spanning more than five years that went all the way through the courts, eventually ending up in the Supreme Court.

Typical questions arising from the case include:

What could cause us to become bound by an unsigned draft contract?

If the parties start to act in accordance with the terms of the draft contract this could cause them to become bound by its terms, even if it has not been signed. This is particularly the case if the essential terms of the draft contract have been agreed.

What if the draft contract says it will not be effective until it is signed?

The courts have held that even if the contract states this, then the parties' conduct can amount to a waiver of such a clause - so it is not enough to just rely on this clause.

What is the risk if we become bound by an unsigned contract?

While the majority of the terms may be agreed, there could be important terms that are still being negotiated such as limitation of liability clauses. In these circumstances, you could find that your liability is greater than you would have wanted because you have not had the opportunity to amend a clause put forward by the other party.

What can we do to avoid this happening?

While the best thing to do would be to avoid commencing work until an agreed contract is signed, this is of course not practical for a lot of businesses. You should therefore ensure that in every correspondence it is made expressly clear that work is not being done under the terms of the draftcontract. Parties should make it clear that the terms have not been agreed at every stage until such time as the contract is signed. It is important to obtain legal advice while negotiating contracts.

If you would like further information on how to best protect your position during contract negotiations, please contact Simon Bates on simon.bates@harveyingram.com or call 0121 214 1205 or 0116 257 6146 .