Important reminder of the requirements for a valid exchange of contracts
In Aslam v Rehman  UKUT 251 (LC), the Upper Tribunal (Lands Chamber) examined the requirements for a valid exchange of contracts, stressing the need for a formal delivery.
A buyer and seller of a house where in dispute over whether there was a valid exchange of contracts because they didn’t agree: (i) on when the contracts were dated and whether the contracts were exchanged on that date; and (ii) if the buyer had handed his copy or offered to deliver his copy to the seller by way of actual exchange.
The Upper Tribunal judge cited the case of Commission for New Towns v Cooper  Ch 259 in which the Court of Appeal set out the steps involved in an exchange of contracts: ‘The act of exchange is a formal delivery by each party of its part into the actual or constructive possession of the other with the intention that the parties will become actually bound when exchange occurs, but not before’.
Accordingly, the Upper Tribunal said there was no actual exchange in this case because: (i) there was no evidence that the seller had delivered his part of the contract to the buyer with the intention of becoming bound; and (ii) there was no evidence that the buyer, who held both parts of the contract, was authorised by the seller to carry out the exchange of contracts without first arranging for the formal delivery of the duplicate parts. Therefore, no contract existed.
The decision highlights the requirement for a formal delivery, whether physical, or combined with clear words that leave no doubt that there has been an exchange. Moreover, clear evidence of formal delivery is required because simply inferring that it has occurred is unlikely to be sufficient. To do so, it would be sensible for both parties to instruct solicitors who can exchange using one of the established Law Society formulae.
These formulae are based on the original concept of an exchange of contracts: the creation of a contract by physical delivery of duplicate signed parts at a meeting between the parties. Yet many contracts are made without such a meeting. As Buckley LJ noted in Domb v Isoz  Ch 548: ‘the essential characteristic of exchange of contracts is that each party shall have such a document signed by the other party in his possession or control so that, at his own need, he can have the document available for his own use. Exchange of a written contract for sale is in my judgment effected so soon as each part of the contract, signed by the vendor or the purchaser as the case may be, is in the actual or constructive possession of the other party or of his solicitor’.
Actual possession refers to the physical exchange of contracts, while constructive possession exists where a party has control over the document and can obtain actual physical possession. The Law Society formulae for the exchange of contracts ensure that it is possible to obtain physical possession of a signed contract through the use of undertakings. Under the formulae, a party would therefore be given constructive possession of the other party’s signed part of the contract.