Case of the week – Vital Signs

Think you have entered into a contract? It must be fine as, although neither you nor the other party have finalised the paperwork, you have started doing business together, right?

Well, that may not be the case after a bold decision by the High Court in Rosalina Investments Ltd and another v New Balance Athletic Shoes (UK) Ltd.

In 2016 a written agreement dating back to 2013 between the parties, in which Rosalina granted New Balance exclusive rights to use the image rights of Manchester United footballer Marouane Fellaini, expired. In the following 6 month period the parties exchanged numerous emails discussing the terms of an extension or renewal of the agreement, although no agreement was finalised. Despite this, New Balance continued to provide football boots and clothing to Fellaini who continued to wear and promote the products until January 2017.

On 11 January 2017, New Balance wrote to Rosalina confirming that it did not wish to extend the agreement and proposed paying a sum “in recognition of the services provided” between July 2016 and January 2017. Rosalina subsequently replied via its solicitors expressing its view that a valid agreement had been in place since August 2016 and stating that by breaking off negotiations New Balance had breached said contract. Rosalina also asserted, in the alternative, that New Balance had an obligation to negotiate in good faith and, subsequently, proceedings were issued against New Balance in the sum of £2 million. New Balance defended the claim by arguing that the numerous exchanges of correspondence did not constitute an agreement and did not demonstrate the conclusion of an agreement between the parties. Whilst a draft agreement was exchanged, this was amended and the need for the agreement to be finalised and signed was emphasised by both parties. New Balance argued that this was indicative of an intention on both sides for the signature to be the point at which the parties were contractually bound.

The High Court was required to consider an application to strike out the claim and award summary judgment to New Balance and in doing so the court made a number of observations. In particular, it was noted that in this instance it was clear that completion of the agreement could only be shown by both parties signing the document and that, as no signatures were given, there was no binding agreement. The court also found references to amendments and changes to the draft agreement in the exchanges of correspondence to be “highly suggestive of a contract that is not yet over the finishing line”. Furthermore, it found that an open ended obligation to negotiate in good faith, as was asserted by Rosalina, would be void for uncertainty.

Accordingly, the court summarily determined the claim in favour of New Balance on the basis that Rosalina’s claim had no prospects of success.

Whilst it is often the case that a contract can be created without signature, by virtue of the actions of the parties, this case provides a stark warning for businesses that start to act in accordance with what they believe to be a contract before the contract has been clearly concluded. In particular, where parties are exchanging emails or having discussions over the terms of an agreement they should be careful not to start carrying out their obligations under the contract on the assumption that they are “pretty much there” with the contractual formalities. The decision suggests that the courts will take all discussions and actions into account when assessing the intentions of the parties and may well decide that ongoing negotiations are demonstrative of an incomplete contract, even where both sides are acting as if the contract is in place.

If you are unsure whether you are doing business under a binding contract, or you simply want some assistance in finalising negotiations over a future contract, please do not hesitate to get in touch.