Pre-Contract Negotiations

• Published date: 25 August 2023
• Subject Matter: Corporate/Commercial Law, Contracts and Commercial Law
• Law Firm: Shepherd and Wedderburn LLP
• Author: Mr Matthew Phillip

When negotiating a contract, it is important to distinguish between statements that are 'pre-contractual' and made as part of negotiations, and those that are intended to be contractual terms. There are significant consequences for parties who make false or misleading pre-contractual statements, however the remedies that are available to the aggrieved party are not as strong as those applicable for a breach of contract.

If a party has been convinced to enter a contract by a pre-contractual statement made by the other party, and that statement turns out to be inaccurate, they may be entitled to rescind the contract and to claim damages for any loss suffered.

In the case of a term of a contract breach, remedies include rescission and damages but also extend to specific implement, interdict, and 'self-help' remedies such as performance retention and suspension.

This is why it is important to draw a distinction between these terms, and for parties to be aware of the nature of the statements made and the effect that they have.

Identifying pre-contractual statements

It can be difficult to identify which statements are pre-contractual and which are contractual, particularly in the absence of a well-drafted agreement or where an agreement has a retrospective effect. There are three main categories of pre-contractual statements:

• Invitations to treat
• Pre-contract documents
• Representations.

If a statement falls into any of these categories, it cannot also be a term of the contract.

One: Invitations to treat

An invitation to treat is an expression of willingness to contract as opposed to an offer to contract. Unlike an offer, it should display no intention to be bound at that particular point in time. Advertisements, catalogues, and requests for tenders are all invitations to treat. These differ from offers which must be specific, complete, and capable of acceptance.

An offer must contain the material terms needed to form a contract and intend to evoke acceptance, whereas an invitation to treat is simply a negotiation tool.

Two: Pre-contract documents

Pre-contract documents such as heads of agreement and terms sheets are tools that can advance pre-contract negotiations. They demonstrate how close the parties are to a deal and provide a framework for further negotiation. Usually, these documents are not binding, however, as the High Court held in New Media Holding Company LLC v Ivan Kuznetsov [2016] EWHC 360 (QB),a term sheet can constitute a legally binding...