Claire Acklam, a Senior Associate solicitor in Walker Morris' Commercial Dispute Resolution team who specialises in resolving development disputes, explains the essentials of contract formation. In particular, Claire offers practical advice for developers who negotiate and contract – often with suppliers – on standard terms and conditions.
Contract formation and the 'battle of the forms': What are the issues?
Contracts relating to the development of land and property commonly include promotion agreements, joint venture arrangements, overage provisions, agreements for sale and options to purchase, among others. These types of contracts are often negotiated and drafted meticulously, as the schemes that they underpin are usually high value and the issues that arise are complex, fraught with risk and particular to their own site and factual circumstances 1.
It is important to note, however, that development schemes also involve a multitude of other contractual arrangements – for example the numerous arrangements covering the supply of goods, materials, labour, services, and so on. Many such arrangements are dealt with informally and/or orally, often as a result of long-standing relationships; and many are dealt with via e-mail and/or conducted via standard terms which may be noted on, say, the reverse of invoices or other payment or process documents or communications.
Regardless of the means by which a contract comes into being, once it has been formed its terms are legally binding on the parties. It is therefore vital that the parties understand exactly the terms that are incorporated into their informal/oral contracts; and whose terms prevail when contracts arise following an exchange of 'standard' documents.
Formation of contracts: back to basics
A contract is formed when all of the following key elements are present: offer; acceptance; consideration (that is, money or money's worth); certainty of terms; and intention to create legal relations 2.
Contracts can be made orally (face-to-face or via some communication medium such as the telephone); via an exchange of e-mails or other correspondence; or they can even arise by virtue of the parties' conduct. Crucially therefore (with some limited exceptions) contracts can be formed without any written documentation or other formality whatsoever. In the same way that a contract can be formed without any formality, so too can it be varied without any formality.
Battle of the forms
Where contracts come into existence by virtue of the exchange of correspondence, invoices or other documents incorporating a business' standard terms and conditions, the governing terms of that contract will generally be determined by the doctrine known as 'the battle of the forms'. This is where parties make and accept contractual offers and counter-offers each using their own standard terms in the hope that they will prevail to govern the contract. In the majority of circumstances, whether a party's terms will apply depends on the 'last shot' principle – i.e. whether their terms were the last to pass before the contract was concluded.
The practical application of the battle of the forms was brought into sharp focus by a recent case, TRW v Panasonic 3. Somewhat surprisingly, the High Court held that, in this case, the 'first shot' terms had won.
The first shot had been fired by the seller. It had commenced the to-ing and fro-ing of negotiations for a supply relationship that would involve multiple orders for a regular flow of products over time by asking the purchaser to sign its 'customer file' (i.e. an umbrella agreement intended to govern the relationship as a whole). When the purchaser subsequently bought a product, it believed it had done so on the basis of its own standard terms, as they had been the last to pass between the parties before that particular purchase was concluded. However, the 'first shot' umbrella agreement had contained a term which stated that the purchaser was bound by the seller's standard terms and that no other terms would apply unless confirmed by the seller in writing. Subsequent exchanges of the parties' respective standard terms did not constitute the seller confirming in writing the application of any other terms, and so the seller's first shot prevailed.
The TRW case highlights that the battle of the forms is about more than just the last shot principle. Rather, the terms which govern a contractual relationship can depend on a number of concurrent and often competing factors, including whether the terms were properly drawn to the opponent's attention, whether the contract was stated to be subject to particular terms, whether the last shot principle has been displaced by any expressly stated and accepted earlier terms, and so on.
At the outset of many development ventures, relationships are positive, often long-standing, and parties are eager to get on with doing business together. Whilst significant time and care is afforded to the more complex development contracts, repeat business with suppliers and contractors, and the tight timescales within which many schemes operate, often mean that deals are done informally and work is commenced without formal legal documentation always being put in place. In addition, with e-mail now being the predominant means by which business is conducted, there is an increased risk that e-mail correspondence can result in the inadvertent creation of binding – albeit informally documented – legal obligations.
At the same time, a lack of understanding about the formation of contracts (including the battle of the forms) can have devastating consequences. For example, a party may have invested significant time and money in a project on the understanding that its opposite number was contractually bound to the scheme – perhaps even on terms that have governed contractual arrangements between the parties in the past – only to find that, in fact, no binding obligations are actually in effect and that its opposite number can walk away scot-free, leaving the project to collapse, at any time. Similarly, a party may be operating under the assumption that key terms (say, as to price, delivery of materials, or termination options) apply as per its own standard terms, only to find that their conduct, or something they said to their opposite number several weeks ago, or the fact that their counterparty's standard terms actually prevail, has committed them contractually to what is now an unfavourable – or worse, unfeasible – deal.
Developers and other commercial contracting parties and real estate practitioners should note the following practical advice:
- An awareness of the likely scenarios in which informal commercial discussions and/or e-mail correspondence may arise for a particular development business will be key to getting the balance right between being able to quickly obtain sufficient comfort to enable parties to proceed with their plans, and becoming legally bound on appropriate terms.
- The lack of any specific requirement for formality and/or documentation means that contracts can be formed or varied orally and by conduct as well as in writing. It is therefore important that parties should not act in any way that is inconsistent with their contractual intentions in case a contract comes into effect prematurely, inadvertently or on unsuitable terms.
- Ideally, parties should communicate their intentions clearly when negotiating. If you do not intend to be bound until a formal document is signed or further terms are agreed, expressly and prominently label correspondence and draft agreements as "subject to contract". This includes email correspondence 4.
- When it comes to dealing with suppliers – or any other counterparties which might seek to deal on standard terms – a full understanding of the application of the battle of the forms is essential. Any invoices or other process documents, including umbrella and service level agreements, can come into play in the battle of the forms. Their terms, and when they are 'fired', will be relevant.
- In some cases it will be worth a developer reviewing its own standard terms and conditions – in contracts of various types – in case there is the potential to ensure, via the drafting, that such terms will always prevail.
- It is essential that developers educate their staff – in the office and on site – as to the risks of both inadvertent contract formation and of conducting business outside internal/standard procedures and/or outside their remit or authority.
- For large organisations, it can be particularly important to ensure that different teams are aligned to the same position (so that, for example, operational teams behave consistently with procurement teams if a contract is not yet meant to be binding).
- In addition, before committing resources and expenditure to perform a particular transaction, developers should be clear that any counterparties have actually committed to their side of the bargain, and that all parties understand the terms on which their contractual relationship is based.
1 For detailed practical advice in relation to the negotiation of complex development contracts, and in relation to the resolution of development contract disputes, please see our recent briefing
2 In a commercial context there is a rebuttable presumption of an intention to create legal relations
3 TRW Ltd v Panasonic Industry Europe GmbH & Anor  EWHC 19 (TCC)
4 "Subject to contract" or equivalent language is a strong indicator that parties do not intend to be legally bound, but it is not conclusive. A court will look at all of the parties' words – and conduct – when deciding whether or not a contract has been formed in any particular case
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.