Contract by Conduct: A reminder from the Commercial Court

In the recent case of Reveille Independent LLC v Anotech International (UK) Ltd [2015] EWHC 726 (Comm), the English Commercial Court has ruled that even where a contract clearly contains completion formality requirements, the conduct of the parties may amount to a waiver of those requirements and both acceptance of the offer and communication of acceptance.

Background

The claimant, a US-based television company, had entered into a “deal memorandum” with the defendant cookware distributor, pursuant to which the claimant would license to the defendant certain intellectual property rights, pertaining primarily to the MasterChef US brand, and promote the defendant’s products in its television series. 

The deal memorandum was expressed not to be binding until signed by both parties and was intended to be replaced by a long form agreement, which was never concluded as negotiations broke down. 

The defendant claimed that it was not bound by the terms of the deal memorandum.  The claimant had not signed the document and therefore not accepted its terms.  The question for the court to consider was whether the claimant’s conduct was sufficient to amount to a waiver of the requirement for signature and whether acceptance by conduct had occurred and been communicated to the defendant.

Additionally, the defendant argued that the agreement was subject to a condition precedent which had not been fulfilled.  On signing the deal memorandum, the defendant had included a manuscript note that a “branding conflict” with the chef, Gordon Ramsay, had to be resolved.

Acceptance by Conduct

It is an established principle of English contract law that the signature of the parties to an agreement is not a prerequisite to the existence of contractual relations.  Typically, where the contract prescribes acceptance to be communicated in a specific fashion, this will be binding; however, following the decision of the Commercial Court, the conduct of the parties can indicate acceptance and a clear intention to be bound.

In the present case, the judge found that the requirement for the parties to sign the contract was expressed to be for the benefit of the claimant only.  Consequently, the court held, the claimant alone could waive the requirement. 

The judge found that the claimant had indeed waived the requirement.  The claimant had integrated the defendant’s products into television episodes as required and had given the defendant the right to use of the intellectual property rights.  Moreover, the defendant had acknowledged that it would be liable to pay for the integrations into the television episodes and had marketed its own products using the intellectual property rights licensed by the claimant.

The acts carried out by both parties were significant enough to go beyond any reasonable steps taken in anticipation of an agreement being reached and were clear evidence of the claimant’s acceptance and communication of this to the defendant.  The judge held that the work anticipated by the deal memorandum had been carried out and that this demonstrated the acknowledgement by both parties that they were contractually bound.

The “branding conflict”

In considering the purported “branding conflict” condition precedent contained in the deal memorandum, the court held in favour of the claimant and determined that this was not a condition precedent to the agreement.

The claimant had argued it was only obliged to take reasonable steps to prevent a website from using the MasterChef brand to market Gordon Ramsay’s products, which it had done.  Conversely, the defendant had argued that the term required the claimant to prevent Gordon Ramsay from selling his own range of cooking products in the US, something both sides knew from the outset the claimant would not be able to achieve.

The court held that the claimant would not have agreed to take on an obligation that both sides knew it could not meet and certainly would not have made the existence of the contract contingent on such a condition.

Comment

This case confirms that the English courts are willing to accept that the conduct of the parties to an agreement can override an express provision in a contract requiring certain prescribed completion formalities.  Whether a party’s conduct constitutes acceptance and whether this has been effectively communicated to the offeror will be a question of fact in each case, but the more substantial the work is, the more difficult it will be to argue that the parties did not intend to be legally bound.

Parties to commercial contracts should always seek to ensure agreements are signed where possible before any substantive work is commenced.  The courts are willing to accept the commercial reality that circumstances may necessitate the parties performing their obligations prior to the agreement of the final terms of the contract.  However, where the parties’ actions clearly go beyond steps in anticipation of an agreement being reached, the parties will clearly not be prevented from claiming for losses arising out of the performance of their obligations. 

This article was written by Simon Holdsworth.