The fact the case was litigated reflects the fact that whilst certain contracts, such as those for the sale of land, must comply with specific legal formalities in order to be legally enforceable, no such formal legal requirements govern many commercial contracts.
This means that whilst written contracts are commonly and widely used, it nonetheless remains possible for contacts to be entered into without formality. As the Judge said:-
“The mere fact that the discussion took place over dinner in a smart restaurant does not, of itself, preclude the coming into existence of a binding contract. A contract can be made anywhere, in any circumstances.”
In order to create a binding contract, the law requires that there must be certainty as to the terms of the contract, an intention by the parties to create legal relations and “consideration”; namely the value promised to another when a contract is made. There must also be an acceptance of the contractual terms offered.
In this case, the Judge made clear that “the fact that this alleged agreement was made in a highly informal and relaxed setting means that the court should closely scrutinise the contention that, despite the setting, there was an intention to create legal relations.”
The Judge went onto find, based on the evidence before the Court, there was no binding contract. However, the case serves to demonstrate how fact sensitive cases such as these can be.
The reality is that the question of when and whether a contract has been formed, for example by the acceptance of terms under discussion, can be uncertain. This can be particularly the case where there has been a course of both oral and written negotiations. Accordingly, to avoid the risk that a contract might be created inadvertently or prematurely during the course of a negotiation, parties will often use the words “Subject to Contract”.
This phrase indicates that until a formal written contract is signed the parties do not intend to enter into binding contractual obligations. “Subject to Contract” is commonly used during commercial negotiations but also in conjunction with the words “Without Prejudice” when attempts are being made to settle a dispute.
The courts will uphold the non-binding status of “Subject to Contract” negotiations except in very strong and exceptional cases where the parties have taken steps from which the court will infer that an implied binding agreement has been reached. For example, by acting in accordance with the terms of the proposed contract as set out in correspondence or a ‘Heads of Terms’ document, even though a contract has not been signed.
In informal settings, the use of words such as “Subject to Contract” is less likely and the scope for legal dispute about the status of the discussions a later date inevitably increases. In such circumstances the Judge’s reminder that a “contract can be made anywhere, in any circumstances” serves as timely warning.
Not surprisingly, when things go wrong, these cases are likely to become the subject of litigation, particularly where one party has incurred significant costs in the belief that it has won a contract and the parties subsequent conduct is arguably consistent with a contract having been formed.
MacInnes v Gross  EWHC 46 (QB)
Simon Lockley is a Director of Lupton Fawcett, Solicitors and a member of the firm’s Dispute Management team.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.