Physical exchange of two identical parts of the contract is the usual method adopted by the seller and the buyer of bringing the contract into existence.

The contract will usually be prepared in 2 identical parts, one for signature by the seller and one by the buyer. The contracts must be identical in every way (save for the signatures by the parties) including filling in the date of the contract and the date agreed for completion. The 2 parts are physically exchanged, with the buyer receiving the part signed by the seller and the seller receiving the part signed by the buyer.

The terms of a contract can, however, be contained in a single document signed by all the parties.

The time when the contract comes into existence depends upon the method of exchange used.

Exchange of contracts by telephone

This is now the most common method of exchanging contracts. Both parties’ solicitors must agree before exchange that exchange of contracts by the telephone is to be governed by one of the Law Society’s formulae: A, B or C.

The use of these formulae allow the solicitors to agree by telephone that contracts are exchanged and therefore are legally binding at that point in time rather than when a physical exchange of contracts takes place.

Each of the formulae incorporates firm’s undertakings and therefore solicitors need to consider who within their firms is to be authorised to exchange contracts using this method. For guidance on solicitors’ undertakings see Chapter 18 of The Guide to the Professional Conduct of Solicitors 1999 or at the Law Society website [NB: Risk management issue]

Whilst the formulae may be used where a party is represented by a solicitor or licensed conveyancer, they must not be used where a party is represented by an unqualified person since their undertaking would not be enforceable in the same way as that of a solicitor or licensed conveyancer.

The text for these formulae, A, B & C and explanatory notes can be found in The Guide to the Professional Conduct of Solicitors 1999 as Annex 25D or at the Law Society website [select Annex 25D – Guidance – Law Society’s formulae for exchanging contracts by telephone, fax or telex].

Formula A is for use where one solicitor holds both signed parts of the contract.
The solicitors agree on the telephone that contracts are exchanged in accordance with Formula A. The contract becomes binding at this point. The solicitor holding both parts of the contract dates them and sends the part signed by his client to the solicitor on the other side.

Formula B is for use where each solicitor holds his own clients signed part of the contract.
The solicitors agree on the telephone that contracts are exchanged in accordance with Formula B. The contract becomes binding at this point. Each solicitor dates his clients signed part of the contract and sends it to the other solicitor.

Formula C is for use where each solicitor holds his own clients signed part of the contract (and is particularly for use in chain transactions).
The solicitors agree on the telephone to release the contracts for exchange for a specified period. Note: Under Formula C the ultimate recipient of the deposit in the chain must hold it as stakeholder. Where Formula C is to be used, it is a requirement of that formula that express authority to use this method be obtained.

The Law Society’s explanatory notes on the use of the formulae include a suggested form of authority to exchange contracts on a Formula C basis. It should be adapted to cover any special circumstances – see the Law Society website [select Annex 25D – Guidance – Law Society’s formulae for exchanging contracts by telephone, fax or telex] [See Note 8].

A contemporaneous memorandum should be made of details of the exchange, together with any variations to the formulae agreed between solicitors. Any such agreed variations should be confirmed in correspondence between solicitors.

Where an undertaking is given to send a deposit cheque/transfer funds electronically to the solicitor acting on the other side, compliance must take place on the day of exchange. If, for example, it is too late in the day to send a deposit cheque or transfer funds electronically, then compliance must take place as soon as possible on the following day.

Exchange of contracts personally

This method is less common because of the time and inconvenience involved.

Here, the solicitors physically meet and a contract exists from the moment of physical exchange. The benefit of this method is that the parties can check before exchange that both parts of the contract are identical and that the contracts have been signed, instead of having to relying on the solicitor’s confirmation to this effect.

Exchange of contracts by post

Here, the buyer’s solicitor will send his client’s signed contract and deposit cheque to the seller’s solicitor. Once the seller’s solicitor receives them he will post his client’s signed contract to the buyer’s solicitor. The contract becomes binding when the seller’s solicitor posts his part of the contract to the buyer’s solicitor.

A contract will be binding even if the seller’s part is lost in the post and is never received by the buyer’s solicitor.

There is no guarantee that that the seller’s solicitor will complete the exchange of contracts by posting his client’s part of the contract and the seller can still withdraw from the transaction so there is an element of uncertainty.

Exchange by document exchange

The document exchange can be used to exchange contracts in a similar way to the postal service. When exchange is effected, however, differs from normal postal service; the contract will come into existence when the seller’s part of the contract is received by the buyer’s solicitor.

No exchange by fax

It was held in the case of Milton Keynes Development Corporation v Cooper (Great Britain) Limited [1993] EGCS 142 that an exchange of faxes was not an exchange of contracts because the legal requirements for the creation of a land contract under s2 of the Law of Property (Miscellaneous Provisions) Act 1989 had not been satisfied.

Fax can, however, be used to transmit the messages which activate the Law Society’s Formulae ie fax is used as a substitute for the telephone.