A case recently decided by the High Court in England highlights the need for businesses to understand when a contract is validly concluded. In the case of Bear Stearns Bank Plc v Forum Global Equity Ltd, Mr Justice Smith upheld the rule that agreements reached over the phone could form valid contracts, and no further formality was required. With deals regularly being concluded over the phone, and paperwork completed at a later date, the ability to rely upon oral agreements can be important to ensure businesses can work efficiently.
The case involved the selling of distressed debt in financially troubled companies, in the hope the debt would translate into a share of any new company which emerged from an administration. Having agreed an oral contract over the phone, the defendants then attempted to evade the terms of the agreement when the deal became unprofitable for them. Mr Justice Smith held the oral contract between the parties was valid, and the defendants were required to compensate the claimant for their loss resulting from its actions.
This decision should come as no surprise to Scottish businesses since there is little need for contracts to be in a particular form; Scots law has long recognised that informal contracts can be binding. However, this case serves as a timely reminder that businesses need to be aware of the contractual implications of using telephone and email to conduct negotiations. With the increasing use of these forms of communication businesses must remain aware of the potential for forming contracts through these less formal means, and the extent to which they can be bound to a contract by the actions of their employees.
Since the Requirements of Writing (Scotland) Act 1995 came into force, Scots law has been very clear that, unless a contract relates to a small number of exceptions (for example, contracts relating to a transfer of land), it will not require a written transcription to be valid and businesses can sometimes find that staff are concluding contracts without being aware their actions are binding.
Employees are generally able to bind their employing company where they have been given express or implied authority to act as an agent for the company, either in a limited area, or for the company as a whole.
Where an employee has this authority, companies should be aware that the employee's involvement in negotiations through email or phone correspondence could result in a contract being formed, even if he or she thought that a more formal contract was required to make the agreement legally binding. In some circumstances a conversation or email can constitute an offer and, should it be accepted, a contract will be formed according to the terms agreed. There would be no need to reduce this agreement to writing, and potentially therefore no opportunity to review the agreement as a whole before it becomes binding.
Businesses should train staff to understand when a contract may be formed by informal communications and instruct them to be careful how they communicate, particularly those regularly engaged in contract negotiations which take place by phone or email. Employees should make it clear the company will not be bound until a written contract is signed by an authorised signatory. It may be worth including in negotiations (and email signatures) a term that contracts will only be concluded once a written copy of the contract has been signed. This may help businesses avoid the pitfalls of unintended or incorrect contracts being concluded in informal circumstances. Communication is the key and a company policy, coupled with clear instructions to staff, is vital.
Joanna Boag-Thomson is a partner specialising in IP/IT with commercial law with UK law firm Shepherd and Wedderburn