Bryan Cave recently represented the successful claimant in a case which highlights to parties that, even where they have set out formal requirements for signature before becoming bound by a contract, the way they act can be as effective as signing on the dotted line in creating a legally binding contract.
The Court of Appeal has confirmed that a signed agreement put forward by an offeror which specifies that it cannot become binding until signed by both parties can, nevertheless, become legally binding even when not signed by the offeree. The Court agreed with the judge at first instance that communication of acceptance was clear and unequivocal where the offeree had simply started performing the terms of the offer, and upheld the broader principle that “in commercial dealings the reasonable expectations of honest, sensible business persons must be protected”.
Case Facts
The dispute concerned whether a binding contract had come into existence between Reveille Independent LLC (“R”) and Anotech International (UK) Ltd (“A”). R and A had entered into negotiations to license IP rights in the MasterChef brand for five years in the USA and Canada to A and to integrate A’s branded cookware into three episodes of Masterchef broadcast in the US on the Fox Network (“Fox”).
As a result A signed a short deal memorandum (the “Deal Memo”) which envisaged that detailed long form agreements would be signed shortly thereafter. The Deal Memo included the wording “This [Deal Memo] shall not be binding on [R] until executed by both [A] and [R] below”. The Judge at first instance had found as a matter of fact that the Deal Memo was not signed by R. Accordingly, the question to be decided by the Court of Appeal was whether the Deal Memo was a legally binding contract as a result of being an offer by A which was accepted by R’s conduct.
The Judge at first instance held that it was overwhelmingly clear that the parties had carried out the work envisaged by the Deal Memo but acknowledged that although “it goes a long way” that did not, by itself, mean that there was acceptance by conduct.
It was contended by A on appeal that in circumstances where R had specifically inserted wording in the Deal Memo intended to prevent itself from becoming informally bound, and had not in fact signed the Deal Memo, it was not possible for R to have shown the clear and unequivocal acts necessary to waive the provision and demonstrate acceptance through conduct. A argued that R’s performance could at all times simply have been in anticipation of a contract.
In analysing the criteria for acceptance by conduct, the Court of Appeal referred to the balance required between the need for certainty in commercial contracts and the reasonable expectations of honest sensible businessmen, quoting Lord Steyn’s dicta in G. Percy Trentham Ltd v. Archital Luxfer Ltd [1993] 1 Lloyds Rep. [25]: “Contracts may come into existence, not as a result of offer and acceptance, but during and as a result of performance” and [27] “the fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to create legal relations”. The Court of Appeal referred to this as a “realistic approach” to be used in analysing whether a party had accepted through conduct.
The Deal Memo was in R’s standard form and had been marked up and returned to R signed by A. In light of amendments proposed by A, this constituted the offer, and accordingly the assumption is that the offer is drawn by the offeror and that the stipulations as to the mode of acceptance were for its (therefore A’s) benefit. The Court of Appeal confirmed a) that a party may waive its right to sign a contract before being bound, and (b) that where signature as the prescribed mode of acceptance was intended to be for the benefit of the offeree (i.e R), the offeree may effectively accept in another way, if it can be shown that the failure to sign caused no prejudice to the offeror.
The Court of Appeal found that, objectively, there was no prejudice to A in circumstances where A had, on the facts, facilitated R’s performance of the Deal Memo’s terms. In addition, the Court found that there was clear evidence of acceptance by conduct by R in the weeks immediately following the signature of the Deal Memo by A including (1) R’s integration of A’s cookware in the episodes of MasterChef recorded during that period with the use of talking points provided by A after the Deal Memo; (2) R’s approval of A’s request to use the MasterChef brand at the Chicago International Home and Housewares Show, where R had previously made clear that R’s approval to use the brand was conditional on the signature of the Deal Memo; (3) the press release, approved by A, announcing the partnership and A’s presentation at the Chicago Housewares Show; and (4) R’s treatment of A as one of its licensees by including it in joint emails and weekly conference calls with other licensees.
Unlike the Judge at first instance, the Court of Appeal found it necessary to identify a date following which the conduct set out above led to a binding contract. The conduct identified after this date did not go to acceptance but could rightly be used as evidence that the parties believed that there was a binding agreement in place. The Court of Appeal held, summarising the evidence following the date of the contract, that there “was nothing standing in the way” of the conclusion that the parties understood there to be a binding contract in place.
Notably, around six weeks after the signature by A of the Deal Memo, R requested that A sign a new version of the Deal Memo, amended to remove a term originally inserted by A regarding a branding conflict needing “to be resolved”. A refused to sign the new version on the basis that the branding conflict had not been resolved to its knowledge, and R did not pursue signature. A contended on appeal that this constituted a counter-offer and/or evidence of R’s knowledge that there was no binding contract as at that date. The Court of Appeal rejected this contention, finding that on a true contractual analysis, A’s refusal to sign was an allegation of breach of contract (which was not made out as the Judge had found that the term had, in fact, been resolved). The Court of Appeal viewed the exchange as evidence of R’s wish to have a document signed which properly reflected the terms of the contract they were already performing, and R’s failure to pursue signature was reasonable where the parties were in the process of negotiating long form contracts.
In conclusion, R was therefore entitled to, and had, accepted the terms of the Deal Memo by conduct.
Conclusion
The case provides a useful, concise reaffirmation of the basic principles of contract law in relation to offer and acceptance by conduct. It also confirms that the legal safety net remains in place to protect the expectations of honest, sensible businessmen who proceed with the performance of contracts in good faith in circumstances where no properly executed contract is in place. On the other hand, it should also serve as a cautionary tale that where parties do not sign on the dotted line yet perform, they do so at the expense of certainty regarding the precise date of the contract, and may need a Court to confirm their “reasonable expectation” that there was a contract at all.
