Contractual “Black Holes”

Court of Appeal holds that phrase “a formal contract will follow” did not make an agreement subject to contract

In the case of Immingham Storage Company Ltd v Clear plc [2011] EWCA Civ 89, the Court of Appeal has considered whether an e-mail exchange, which included the phrase “a formal contract will follow” was subject to contract.

In commercial negotiations, the phrase “subject to contract” creates a strong presumption that the parties do not yet desire to be bound. Parties who do not use this formula need to make it clear if their agreement on the main points is a non-binding pre-agreement, rather than a binding but conditional agreement.

This decision illustrates the risk that a vague reference to a formal agreement may not be enough to achieve this when the main terms are all agreed. The word “formal” may even indicate that any further agreement is a mere formality, as the substance has already been agreed.

It also reinforces the point that certainty in contracts is essential and in many cases, would avoid the need to litigate.  As I always advise my clients, informational “black holes” such as ambiguity and omissions only serve to create problems when the true intention of an agreement is being debated, whether between the parties or before a judge.

Gregory Abrams Davidson LLP

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