Originally published September 2005
A recent decision of the Court of Session offers a useful reminder that even where parties have reached agreement on all the salient terms of a contract, it does not necessarily constitute a binding agreement which the courts will enforce.
In the case of WS Karoulias v The Drambuie Liqueur Company Ltd Lord Clarke had to consider whether the parties had reached a binding and legally enforceable agreement whereby Karoulias would be the exclusive distributor of Drambuie products in Greece for a 5 year period commencing in June 2003.
Karoulias had been Drambuie's Greek distributors since 1977 and the last distribution agreement between the parties was due to expire in June 2003. The parties commenced negotiations in the summer of 2002 with a view to entering into a new agreement to replace the earlier agreement and run on from its expiry. Discussions were conducted at meetings and, as is increasingly the case, via an exchange of emails. On 30 January 2003, Drambuie's director of corporate affairs emailed Karoulias saying ‘I am attaching for your approval the final draft of the Agreement which incorporates all the changes requested in your email of 30 December subject to a small amendment in 10.3. Once you have confirmed that it is in order I shall send two copies for signature.’ Karoulias replied by confirming that they agreed to the change and asked for two copies for signature.
Following this exchange, Drambuie failed to send the agreement for signature. Parties continued to discuss their ongoing relationship and in early June 2003, Drambuie proposed certain changes to what they described as ‘the contract.’ However, on 11 June 2003, Drambuie issued a termination notice under the contract that was due to expire in 2003 and thereafter entered into negotiations with an alternative distributor.
Karoulias raised proceedings in the Scottish courts seeking various remedies including declarator that a contract had been formed on 5 February 2003 and an order that Drambuie be forced to comply with the terms of the contract.
Although Lord Clarke expressed some sympathy for Karoulias and considered that Drambuie had exploited a longstanding relationship with them, he found that there was no enforceable agreement. Lord Clarke noted in particular that where parties had agreed or had intended not to be bound by the terms of a document until it was signed then it did not matter that parties had reached an agreement on all matters of substance (in the sense of concluded negotiations), as this did not constitute a binding agreement.
Having heard lengthy evidence from both parties Lord Clarke decided that the intention of the parties had been that they would not be bound by the terms of the agreement until they had formally acknowledged its terms by signing it. Accordingly, the absence of a signed contract was fatal to Karoulias' case.
The decision turned largely on the particular facts of the case. The parties' previous conduct since 1977 was a major factor - all previous contracts had been signed, as was their conduct after the 5 February 2003 exchange of emails. Another significant factor was that following 5 February 2003, the parties had not acted as if there was a contract in place between them.
The case is a useful reminder of the principles regarding the formation of contracts. It is all too common for agreed contracts not to be signed. Where work has nonetheless been carried out further to such a contract, it may well be possible to demonstrate that there was agreement that the contract was binding and therefore governed parties' relationship. Where that is not possible, the party who carried out work would ordinarily be able to seek payment based on the principles of quantum meruit.
However where as in this case the ‘contract’ relates to future work and where the particular circumstances demonstrate that the parties would only be bound when it is formally executed, then only once it has been executed will the courts give effect to its terms.
As Lord Clarke noted, ‘In this day and age, when agreements of considerable value and complexity are often informally concluded, this case is, perhaps, a useful reminder that this branch of the law still provides that parties to a complete agreement might stipulate for themselves, either expressly, or impliedly, when, and under what circumstances, the terms of the agreement will be binding in law. They may indeed do so to produce the kind of certainty that avoids disputes about what was agreed between them’.
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