Case law: Party to contractual negotiations fails to prove agreement was reached
Parties negotiating contracts should ensure they both agree how to recognise when negotiations are complete and a final agreement reached, or risk a future dispute as to whether a legally binding contract was in fact concluded – as a recent ruling demonstrates.
This update was published in Legal Alert - March 2019
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A sportswear group had a contract with the management company of a famous footballer, under which he wore and endorsed their products. When the contract ended the parties started to negotiate a new one but, before a new written contract had been signed, the sportswear group purported to withdraw from the negotiations.
The management company argued that despite no new written contract having been signed, the parties had in fact concluded a new agreement, the terms of which could be gleaned from the various correspondence and communication between the parties. It claimed compensation from the sportswear company for failing to perform its obligations under the new contract.
The sportswear company argued that there was no new contract and asked the High Court to strike out the claim.
The legal test for deciding whether the parties have agreed a legally binding contract is an objective test of whether a reasonable person would conclude that there had been:
- a clear offer by one party that had been accepted unconditionally by the other;
- ‘consideration’ from each side, ie, a promise from each to provide something of value to the other (a promise from just one party is not enough); and
- an intention on the part of both parties to create a legally binding relationship.
The Court ruled in favour of the sportswear company. It found on the facts that the parties had not intended to create a legally binding relationship unless and until a formal written contract was signed. As none had been signed, there was no binding agreement.
The relevant facts included that:
- During negotiations the management company had threatened that the footballer would not endorse the sportswear company’s products until a formal contract was signed, the inference being that the absence of a written contract indicated no agreement had been reached.
- Similarly, the language used during the negotiations implied that their conclusion would be marked by signing a written contract; so again, the absence of such a contract indicated no agreement had been reached.
- The purported contract required personal guarantees to be given at the same time as it was agreed. However, the management company did not sign and send such guarantees until several weeks after it alleged the parties had reached agreement.
- The parties were still negotiating important terms (such as how the proposed contact was to be terminated), after the date the management company alleged an agreement had been concluded.
The claim against the sportwear company was therefore struck out.
- Parties negotiating contracts should ensure they agree how to recognise when the negotiations are complete and a final agreement reached, or risk a dispute as to whether a legally binding contract had in fact been concluded.
Case ref: Rosalina Investments Ltd v New Balance Athletic Shoes (UK) Ltd  EWHC 1014
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.
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