When the parties enter into an agreement subject to
contract, they are expressly stating that they will not be
bound unless and until a formal contract is drawn up.
There are situations where it would appear at first
sight that the parties had entered into a commercial
arrangement, but, nevertheless, a contract is not created.
1 Collective agreements. Employers and trade unions
regularly enter into collective agreements about rates of
pay and conditions of employment. Section 179 of the
Trade Union and Labour Relations (Consolidation) Act
1992 states that such agreements are not intended to be
legally enforceable unless they are in writing and
expressly affirm that they are to be binding. It should be
noted, however, that the Employment Relations Act
1999 inserted a new s 70A in the 1992 Act, which deals
with recognition of trade unions. Under s 70A, agree-
ments between an employer and a trade union about the
method by which they will conduct collective bargaining
(or if not agreed by the parties, specified by the Central
Arbitration Committee) will take effect as if they were
contained in a legally enforceable contract. The only
remedy for breach is specific performance.
2 Advertisements.Generally speaking, vague promises
or guarantees given in the course of promoting a prod-
uct are not intended to be taken seriously. By contrast,
more specific pledges such as, ‘If you can find the same
holiday at a lower price in a different brochure, we will
refund you the difference’, are likely to be binding. (See
Carlill vCarbolic Smoke Ball Co.)
3 Public bodies.Where one of the parties is a public
body which is bound by Act of Parliament to supply
a particular service, there is no intention to enter into a
contract with customers. For example, if you post a letter
by ordinary first class mail and it is delayed or lost, you
cannot sue the Post Office for breach of contract.
4 Letters of comfort. A comfort letter is a document
supplied by a third party to a creditor, indicating a con-
cern to ensure that a debtor meets his obligations to the
creditor. Comfort letters are sometimes provided as
an alternative to a formal guarantee in respect of a loan
but are usually carefully worded so as to avoid the crea-
tion of any legal obligation. In Kleinwort Benson Ltd
vMalaysian Mining Corporation Bhd(1989) the Court
of Appeal held that, despite the commercial nature of
the transaction which gave rise to a presumption of
an intention to create legal relations, the comfort letter
provided by Malaysian Mining merely stated its current
policy and did not amount to a contractual promise to
meet the liabilities of its subsidiary.
5 Letters of intent.A letter of intent is a device by which
one person indicates to another that he is likely to place a
contract with him, but is not yet ready to be contractually
bound. A typical example of a situation where a letter of
intent might be provided is where a main contractor is
preparing a tender and he plans to subcontract some of
the work. He would need to know the cost of the sub-
contracted work in order to calculate his own tender, but
would not want to be committed to that subcontractor
until he knows whether his tender has been successful.
In these circumstances, the main contractor writes to tell
the subcontractor that he has been chosen. Normally, the
letter is carefully worded so as to avoid any legal obliga-
tions. However, if the letter of intent invites the sub-
contractor to begin preliminary work, an obligation to
pay for the work will arise even though a formal contract
may never be concluded (British Steel Corporation v
Cleveland Bridge and Engineering Co Ltd(1984)).Social/domestic arrangements
Social arrangements between friends do not usually
amount to contracts because the parties never intend
their agreement to be legally binding. You might agree
to meet someone for lunch or accept an invitation to a
party, but in neither case have you entered into a con-
tract. If it can be shown, however, that the transaction
had a commercial flavour, the court may be prepared to
find the necessary intention for a contract.Part 3Business transactions
226
the USA. The written agreement contained the following
‘Honourable Pledge Clause’:
This arrangement is not entered into... as a formal or
legal agreement and shall not be subject to legal jurisdic-
tion in the law courts... but it is only a definite expression
and record of the purpose and intention of the parties
concerned to which they honourably pledge themselves
that it will be carried through with mutual loyalty and
friendly co-operation.
The claimants placed orders for tissues which were ac-
cepted by the defendants. Before the orders were sent,
the defendants terminated the agency agreement and
refused to send the tissues. The House of Lords held
that the sole agency agreement was not binding owing
to the inclusion of the ‘honourable pledge clause’. Insofar
as orders had been placed and accepted, however, con-
tracts had been created and the defendants, in failing to
execute them, were in breach of contract.