Subject to contract
GLOBAL ASSET v AABAR (CA) [2017]
The heading ‘subject to contract’ is often used on documents to try to show that the parties do not intend to be legally bound because they are still in the process of negotiation and have not yet finalised their agreement, or that the agreement they have reached is not to be binding until it is signed. Here the Court of Appeal (“CA”) had to decide what the impact of subsequent telephone conversations had been which followed a ‘subject to contract’ offer letter.
Facts:
- The parties had been in dispute in relation to a property deal. In April 2015 a letter was sent by Global Asset (“G”) to Aabar (“A”) marked ‘without prejudice - subject to contract’ setting out a proposed basis on which the dispute could be resolved (“First Offer”).
- A telephone call on 6th May 2015 then took place in the course of which it was maintained that the parties reached agreement on the basis of the letter. G was allegedly asked to resend the First Offer in an ‘open and binding’ form without the ‘without prejudice’ wording and was also asked to prove that it had the money available to complete the purchase.
- On 9th May 2015, G emailed A with details of the key commercial terms of the First Offer but G also included various supplemental and different terms. The email referred to a ‘proposed transaction’ and set a deadline for ‘acceptance’ of the offer (“Second Offer”).
- On 10th May 2015, A responded by stating that the Second Offer had not been accepted and that there were no ongoing negotiations between the parties. G applied to the Court for a declaration that the terms of the Second Offer constituted a valid contract.
- In looking at the facts, the Court referred to:
- a number of the terms in later correspondence as being materially different to the First Offer which had mentioned it setting out the ‘key’ terms rather than being exhaustive and self-contained; and
- the size of the proposed deal (some €250million).
- The High Court (“HC”) decided that there was an arguable case that a contract had been concluded during the telephone call on 6th May 2015 following the First Offer.
- A appealed.
Decision:
- The CA decided that the HC was wrong in its finding as this was inconsistent with the parties' subsequent communications after the First Offer and it found in A’s favour. It referred to the First Offer as the ‘foundation stone’ of the telephone call on 6th May 2015. An agreement to waive a ‘subject to contract’ requirement needs to be unequivocal but there was no such agreement in this case.
- When considering whether the alleged contract had been made on the date of the telephone call, the CA said that the HC judge should have taken account of the parties' communications which immediately followed. Although communications after making a contract should not be borne in mind when interpreting a contract, in deciding whether a contract has been concluded in the first place during the course of the negotiations, the Court should look at the whole course of those negotiations.
- The CA went on to say that it was ‘wholly implausible’ for experienced commercial parties to conclude a contract of such value solely on the basis of the original ‘key terms’ letter.
Points to note:
- A ‘subject to contract’ label on communications can be useful in defeating a presumption that a contract has been concluded but it is not infallible. Care needs to be taken with what is said and done during the whole course of negotiations to ensure that you do not find yourself a party to a binding contract when that was not the intention.
- Another recent case on formation of contracts was MacInnes v Gross [2017], which served as a useful reminder of the approach of the Courts to the issues of intention to create legal relations and certainty of terms.