When is a contract not a contract?

A useful demonstration of how important it is to get the basics right in the formation of a contract has emerged, in the High Court case of Everton Football Club Company v Sail Group Limited and another, writes Nichola Evans of Browne Jacobson LLP.

The claim concerned the potential participation by Everton FC in the Vodacom Challenge in South Africa.

During the case, Everton accepted that the negotiations between the parties were conducted on a “subject to contract” basis. However the club maintained that a contract was concluded during a telephone conversation in May 2007 between a representative of Everton FC and a representative from the Second Defendant (a sports consultancy event management business). Disagreeing, the defendants denied that a contract was concluded and said that, in their view, a concluded agreement could only have taken effect if or when a formal agreement was signed by the authorised signatories of all parties. All parties to the claim conceded that no such agreement was ever signed.

At the trial of the claim, which took five days, evidence was heard from a number of witnesses, including two solicitors – the two people who participated in the contentious telephone call.

Having reviewed the evidence in terms of the telephone call, and then the emails which followed, the judge concluded that nothing had changed the mutual understanding of the parties and how the contract ought to be concluded. As a result the judge held that Everton’s claim should be dismissed for damages, which it alleged resulted from the club’s failure to participate in the tournament.

The judge helpfully summarises what a party needs to consider if it wishes to enter into discussions on a “subject to contract” basis and these are a good reminder to all IT contractors  looking to enter into contracts:

• Be careful if an IT contract can be made orally – if you want to make sure that everything is noted down in writing; stipulate that all discussions are subject to contract until such time as a formal document is signed off.

• Although it is not essential that there is an express stipulation that contract discussions are subject to contract and that it is acceptable to show that there was a mutual understanding between the parties, evidentially it is obviously preferable for there to be an express stipulation.

• Subject to contract can apply to any contractual negotiations – most people think of it applying to land transactions.

• Even if negotiations started on the basis of them being subject to contract, this can be changed by the parties at any time.

Recent case law has shown that cases can, and do turn on their facts. It is therefore extremely important that parties are diligent in their drafting, ensuring that they only enter into contracts on the terms that they intended to agree to.

Editor's Note: More legal guidance on CUK's IT contractors' guide to contracts section.