How To Avoid Making A Contract Before You're Ready

A recent Court of Appeal decision has highlighted the risk of entering into a contract via informal channels such as WhatsApp, emails, text messages and phone calls, before any formal written agreement has been drawn up. We look at how to ensure that you're not committed until you're actually ready to be legally bound.

DAZN v Coupang: what happened?

Coupang, a South-Korean e-commerce and streaming provider, sought to acquire a sub-license for the broadcasting rights in the South Korean market for the FIFA Club World Cup from DAZN, a London-based subscription sports streaming service. Negotiations took place primarily through WhatsApp messages, emails and phone calls where the parties agreed key terms, including consideration, exclusivity rights and territorial scope. The parties also agreed that they would enter into a more detailed written agreement. Before that could happen, DAZN received what it regarded as a better offer. Coupang argued that DAZN was already bound by the exchange of WhatsApp and email messages. Despite the lack of a formal contract, the Court of Appeal agreed – and upheld Coupang's successful application to the High Court for orders requiring DAZN to comply with its contractual obligations.

How unusual is this?

The court's judgment here was not an isolated or unusual one. For example, in Immigration Storage Company Ltd v Clear plc (2011), a supplier told its customer that "a formal contract will follow in due course" – but as in DAZN v Coupang, the Court of Appeal ruled that the formal contract was merely a confirmatory step and that in fact, all the key ingredients for a legally binding agreement were already present. More recently, in the Canadian case of South West Terminal Ltd. v Achter Land (2023), a thumbs up emoji sent by Achter was sufficient to express acceptance of an offer to contract. This provides a striking example of the ease with which contracts can come into existence via informal discussions over mobile text messages, email or platforms such as WhatsApp (and in our view, it's likely that an English court would take a similar approach).

How can you reduce the risk of being contractually bound before you're ready?

The phrase 'subject to contract' is generally sufficient to negate any immediate intention to be contractually bound (see, for example the Court of Appeal ruling in London and Regional Investments v TBI plc CA (2022)). This is because the courts will normally see it as a strong indication that the parties did not intend a contract to come into existence until a formal agreement had been drawn up. But these are not "magic words" that will prevail in all circumstances. For example, where the parties have gone ahead with performing the contract, despite the lack of a detailed written agreement, the courts will usually take the view that the parties have decided to ignore any 'subject to contract' conditionality.

Key takeaways

Whilst DAZN v Coupang does not raise any new points of law, it highlights the ease and risk of becoming contractually bound despite the absence of a formal, written contract - particularly where negotiations are being conducted over messaging platforms which tend to encourage informal, often very conversational exchanges. Where parties wish to avoid becoming contractually bound in the course of such exchanges:

• use language such as 'subject to contract' to clearly communicate that there is no intention to be bound until a written contract is executed by the parties (this also allows parties to continue negotiations and provides a right to withdraw at any stage);
• ensure that deal teams are aware of the risks of being legally bound before the business is ready;
• once you are ready to contract, formalise the agreement as soon as possible, preferably by obtaining signatures from both parties on a written contract containing appropriate, detailed terms; and
• have clear procedures for different types of contract – for example, where it's not feasible to involve in house legal or external advisers to review the detailed terms and oversee execution, design your contracting processes so that your standard terms of purchase or supply will apply to the deal.

How we can help

As explained above, there's quite a lot more to this issue than simply labelling your correspondence with customers and suppliers "subject to contract". At some point, it will be in your business' interest for a binding agreement to come into existence – so staff will need to understand when to stop using "subject to contract" and how to ensure that appropriate written terms are put in place (avoiding pitfalls such as the "battle of the forms" when it comes to standard terms). These risks can only be fully addressed through appropriate contracting processes and staff awareness.

We have considerable experience of supporting our clients at every stage of the contracting process, from Heads of Terms through to drafting and negotiating formal agreements. We also work with clients to develop straightforward contract management procedures and deliver engaging and effective training to staff (we're well aware that most staff won't necessarily be as enthusiastic about the law as we are!). To find out more about how we can help, please get in touch.

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.