Relying on a draft? Don’t be daft

The High Court has recently considered the issue of the intention to create legal relations in the case of Volumatic Limited v Ideas for Life Limited [2019] EWHC 2273. The case serves as a stark reminder of the importance of ensuring that a binding agreement is in place before trading and/or continuing to trade. As this is an English decision, it is not technically binding in Scotland but it is highly persuasive.

Background

Volumatic Limited (“Volumatic”) produced a cash handling device called “CounterCache” which was used as a secure storage unit for high value banknotes. The notes are stored in a pouch within this device. The pouch was designed by a third party and was been manufactured by Design for Life Limited (“DFL”) since 2001.

In 2004, Volumatic created an improved pouch named “CounterCache Intelligent” which was intended to be compatible with the original CounterCache device. Ideas for Life Limited (“IFL”) was incorporated in February 2004 with the specific purpose of designing the CounterCache Intelligent pouch which DFL would then manufacture. Discussions between DFL and Volumatic ensued, and an interim confidentiality agreement was signed.

Following a meeting between the parties in February 2005, a draft agreement and minutes of the meeting were circulated. The minutes included the following sentence: “this represents a summary of the proposed agreement – it will require legal input to finalise - …in the meantime DFL and Volumatic will sign this letter/email agreeing the intent to go ahead in this form”.

In May 2005 the draft agreement was signed by both parties setting out the design and production of the CounterCache Intelligent product (the “Agreement”). It provided, amongst other things, that on mutual acknowledgment that various stages of proposed development had been satisfied, all property rights would be transferred from IFL to Volumatic. The final sentence of the Agreement read: “these terms of agreement represent what has been agreed by both party and will form the basis of the formal legal document required as part of the assignment of IFL’s intellectual property rights”. The product was then designed and significant quantities were manufactured and purchased by Volumatic. Whilst this trading relationship continued, the parties did not enter into any subsequent agreement, nor did they act in conformity with the ‘terms’ of the Agreement.

In 2016, Volumatic applied to the Court seeking specific performance of the Agreement. IFL defended the claim, stating that the Agreement was not intended to have legal effect.

Decision

The Court held that in relation to this Agreement, there was no intention to create legal relations. The Judge stipulated that, when taking an objective view, the Agreement was merely a document designed to record the consensus reached at the February 2005 meeting which both parties previously agreed had no legal effect. The signatures were not an indication of an intention to create legal relations but an indication that both parties agreed the document accurately expressed the content and progress of the 2005 meeting.

The Court held that the intention of the parties was not clear at the time of the Agreement, but their conduct was consistent with the Agreement not being binding as neither party sought to rely on its terms including on price, royalty rates and payment terms. It can therefore be said that the Volumatic was “estopped by convention” from establishing that the Agreement was binding. It would be neither fair nor just to go back on the assumption, as demonstrated over an 11-year period, that the Agreement was not intended to be legally binding.

The equitable maxim that he who comes to equity must come with clean hands was also considered by the Court as the specific performance sought by Volumatic is an equitable remedy. The Court’s reasoning was consistent with that applied when determining estoppel by convention, that Volumatic’s conduct did not support the premise that they had come with clean hands.

Comment

This case is a useful reminder that parties must make their intention to create legal relations clear from the outset and ensure that proper contractual agreements are in play before obligations and liabilities are performed. Parties must be cautious as signed agreements may not be all that they seem, there needs to be a clear and explicit intention to create legal relations. The risks associated with the consistent failure to enforce contracts have come to fruition in this case. The Judge was mindful that both parties continued to trade for 11 years notwithstanding the lack of a contractual relationship.

Where there have been warranties, representations or draft contracts in play prior to the conclusion of the final agreement, to ensure that a written contract is watertight, it is always worth including an ‘entire agreement’ clause. This gives certainty that the terms within the written agreement represent the entire contract thereby prohibiting any previous dealings from bearing any weight.

Article co-authored by Cara Aquilina.