In a recent judgment, the Court of Appeal has overturned a High Court decision which found that the defendant had undertaken preliminary work for a building project under an interim contract which did not incorporate any terms and conditions. The Court of Appeal found that terms and conditions had in fact been incorporated by reference, so that the defendant’s liability was limited: Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd  EWCA Civ 2222.
The decision suggests that (whilst there are clearly risks in commencing work without a clear written agreement as to the terms that will apply on an interim basis) the court may be reluctant to conclude that a party has assumed an unlimited liability for works carried out under an interim contract pending negotiation of a final agreement, when it never would have assumed such liability under that final agreement. Each case will, however, turn on its facts and parties would be well advised to ensure there is no room for argument as to the terms that apply at any stage.
The Court of Appeal has rejected a seller’s claim that he was entitled under a sale and purchase agreement (“SPA”) to provide consultancy services to the target company for a further period after an initial four year earn-out. Applying settled principles, the court held that an agreement to provide consultancy services for “such further period as shall reasonably be agreed” was not enforceable because it was an agreement to agree: Morris v Swanton Care & Community Ltd  EWCA Civ 2763.
Though each case will turn on the words used in the specific contract, the decision illustrates that where parties seek to account for future uncertainty by stipulating that the parties will ultimately have to reach further agreement, the courts will be slow to find that either party has an enforceable right in relation to the terms or even the existence of that further agreement. The same is true of a clause requiring parties “reasonably” to agree, or to use best or reasonable endeavours to agree. Such formulations cannot turn an unenforceable provision into an enforceable agreement.
As this case shows, there is a fundamental difference between parties postponing agreement (which, commercially, may be justified given uncertainties surrounding what may happen in the future) and parties actually reaching agreement in relation to future terms of their relationship, albeit with gaps to be resolved between them based on objective criteria capable of assessment by the court. The former does not give rise to any enforceable obligations; the latter may be enforceable, provided that the gaps do not give rise to such uncertainty as to call into question whether there has been a meeting of minds at all.
In the particular context of earn-out provisions in SPAs, parties should be careful to ensure that the relevant provisions preserve sufficient flexibility for the parties to react to future developments but without creating such uncertainty as to render the clause unenforceable. Since each SPA turns on its own terms, it is impossible to adopt a one size fits all approach; however, it is at least clear that if the SPA provision leaves open the possibility of parties agreeing or disagreeing (whether reasonably or not), the courts will be slow to give such a provision binding contractual effect. The Court of Appeal’s judgment also makes clear that if parties wish to create an enforceable agreement by reference to an objective framework which can fill in any gaps later, they are well advised to set out in detail how this objective framework should operate and what factors should, or should not, be taken into account, insofar as these are known at the time the SPA is signed.
John Ogilvie, Neil Blake and Andrew Cooke consider the decision further below. Continue reading
In a recent decision, the Commercial Court has considered whether an arbitration claim was settled in without prejudice correspondence between the parties’ solicitors. It concluded that no binding settlement was reached, as the relevant offer was made subject to the conclusion of a formal settlement agreement and subject to board approval: Goodwood Investments Holdings Inc v ThyssenKrupp Industrial Solutions AG  EWHC 1056 (Comm).
The judge (Males J) noted that it is well established that words such as “subject to contract” indicate that parties do not intend to be bound until a formal contract is executed, and said that the same applies to an agreement which is stated to be subject to the board approval of one or both parties. The latter wording indicates that the person concluding the agreement does not have authority, or at any rate is not prepared, to commit the company unless and until approval is given. Further, the judge commented, since the directors are required to exercise independent judgment as to whether the transaction is in the best interests of the company, it is very hard to see how there could in such circumstances be an express or implied promise that approval would be forthcoming or was a mere formality.
The obvious implication is that parties who receive offers made subject to board approval cannot rely on a binding agreement having been reached unless and until approval is given.
It is possible for “subject to contract” type conditions to be dispensed with by necessary implication, but there was no indication of that in the present case. The judge rejected an argument that the parties’ agreement to adjourn the arbitration confirmed that a binding settlement had been reached. The parties had recognised that the arbitration might need to resume, and had asked the arbitrators to maintain their availability for the remainder of the period set aside for the hearing. That was inconsistent with a binding agreement having been reached.
The judge also rejected an argument that the offeror was under an “interim obligation” to seek board approval and not do anything to prevent approval being granted. It may have been reasonable to expect that approval would be given, but that was a risk that the offeree took.
The decision is also of interest as a relatively rare example of an application to the court under section 45 of the Arbitration Act 1996 for a ruling on a preliminary point of law. The arbitrators had given permission for the application to be made, due to the difficulties that would arise if the arbitrators were to consider the without prejudice correspondence only to find that no settlement had been reached. For more information on that aspect, see this post on our Arbitration Notes blog.
The Court of Appeal has held that a provision in a franchise contract that allowed for the clawback of commission in certain circumstances was sufficiently certain to be enforceable even though it did not specify exactly how the amount of the clawback was to be calculated. The judge had been correct to find that the parties’ intention was for the clawback to be calculated on a straight-line basis over the relevant period: Openwork Limited v Forte  EWCA Civ 783
The decision emphasises that the court will strive to give meaning to a contract term if at all possible. Parties should not accept the inclusion of vague or uncertain terms on the assumption that they will not be capable of enforcement in practice. If the terms are not clear, the court may try to determine their meaning, as it would be understood by a reasonable third party. This may have unintended consequences.
Further guidance on how the courts approach contract issues including contract formation and interpretation can be found in our contract disputes practical guides, available here.
Gary Horlock, an associate in our dispute resolution team, considers the decision further below. Continue reading
The High Court has recently found that a group of waste removal companies which provided services to a company that went into liquidation shortly afterwards was not entitled to recover outstanding sums from the company's founder. The agreement for works had been entered into with the company itself, and the founder had given no guarantee or indemnity in his personal capacity. Even if a guarantee had been given, it was merely oral and therefore unenforceable: Erith Holdings Ltd and Others v Ronald William Murphy  EWHC 1364 (TCC).
This decision serves as a cautionary tale which underlines the importance of knowing who you are contracting with and of recording the terms of your agreement formally in writing rather than relying on oral discussions. Where you have concerns regarding the financial standing of a company you are dealing with, and want to ensure that an individual who stands behind a company takes on personal liability, it will be particularly important to ensure that the individual is a party to the agreement or that any guarantee is properly documented.
Kerrie Barrett, an associate in our disputes team, considers the decision further below.
The High Court has found that an option agreement for the purchase of oil tankers was void for uncertainty where it provided that the delivery date for the vessels would be "mutually agreed upon" when the relevant options were exercised: Teekay Tankers Ltd v STX  EWHC 253 (Comm).
Although the parties had intended the agreement to be binding, the court found that it was impossible to imply a term by which the delivery dates were to be determined if the parties were not able to reach agreement. The delivery dates were an essential term of the contract, and so this was merely a non-binding "agreement to agree".
The Teekay decision shows clearly the difficulties parties may have in enforcing contracts where essential terms are left to be agreed at a later date. Where possible, it is best to agree all important terms in advance. If that is not possible, the agreement should ideally set down some objective standard against which agreement is to be reached, or some other fall back provision to determine the content of the term if there is a deadlock. If the parties wish to retain the freedom to agree, or not, as they see fit, this may result in the agreement being rendered void as a result.
Chris Bushell and Tom Brown, a partner and associate in our disputes team, consider the decision further below. For more on contract formation, and the potential pitfalls, see When do you have a binding contract? It may be more (or less) often than you think, which is part of our series of contract disputes practical guides.
The Court of Appeal has held that the High Court was wrong to find that a contract had arguably been concluded during a telephone call following a "subject to contract" offer letter, when this was inconsistent with the parties' subsequent communications: Global Asset Capital, Inc and another v Aabar Block S.A.R.L and others  EWCA Civ 37.
The Court of Appeal reiterated that when deciding whether a contract has been concluded the court should look at the whole course of the negotiations to avoid forming a misleading impression. Once there is a completed contract, subsequent events will not be considered in determining the proper interpretation of that contract, but that is a different point. Here the judge had been wrong to exclude consideration of subsequent communications in considering whether a contract had been concluded during the telephone call in question.
The decision is a useful reminder of how parties should approach contractual negotiations in order to avoid uncertainty and disputes. For example:
- All correspondence and drafts should be marked "subject to contract" to avoid entering into a contract prematurely – but remember this is not a panacea, as in some circumstances the court may find the "subject to contract" status has been waived.
- Ideally the parties should agree all the terms and document them by signing a written contract (although there is no general requirement for a contract to be in writing in order for it to be binding). If the parties do not agree all the terms there is a risk that the agreement will be too uncertain to be enforced.
The first in our series of contract disputes practical guides, When do you have a binding contract?, provides further guidance on these issues.
Chris Bushell, partner, and Gary Horlock, associate, in our disputes team consider the decision further below.
The Court of Appeal has held, by a majority, that no binding agreement was reached between the seller of several flats and an estate agent, as the parties had failed to agree the circumstances in which the agreed rate of commission would fall due. This was a critical term which, the court said, could not be decided by reference to the standard of reasonableness. That meant the agent was not entitled to commission when the flats were sold to a purchaser he had introduced: Wells v Devani  EWCA Civ 1106.
The Court of Appeal in this case expressed the view that the courts cannot imply terms into an agreement where to do so would transform an incomplete bargain into a legally binding contract. There are however many cases in which the courts have held that a failure to agree essential terms was not fatal to the formation of a binding contract, where it was clear that the parties intended to form a binding contract and the court could fill in the missing term for example by reference to a reasonable price or reasonable time of performance (see for example this blog post).
There may be room for some debate as to precisely how these authorities should be reconciled. As a practical matter, however, what is clear is that parties should expressly agree all essential terms if they want to be certain they will be able to enforce the contract against the counterparty.
Chris Bushell and Tom Brown, a partner and associate in our disputes team, consider the decision further below. For more on when the courts will find that there is a binding contract, and the problems that can arise, see our contract disputes practical guide: When do you have a binding contract?
The recent decision of the Commercial Court in Novus Aviation Limited v Alubaf Arab International Bank BSC(c)  EWHC 1575 (Comm), serves as a cautionary tale to any financial institutions that regularly use letters of commitment.
The court found that a letter of commitment, which was expressed to be “conditional upon satisfactory review and completion of documentation”, was nevertheless legally binding. Further, although it was intended that the commitment letter would become contractually binding once executed by both parties, this did not prevent it from having legal effect when executed by only one party. There was no term of the commitment letter that stipulated that the only means of acceptance was by countersignature, such that acceptance could be communicated by conduct. For more on the decision, please see our banking litigation e-bulletin.
The Court of Appeal has upheld a decision of the Commercial Court which found that a party had accepted the terms of an agreement by its conduct, even though it had not signed the agreement and the agreement purported to require the signatures of both parties to take effect: Reveille Independent LLC v Anotech International (UK) Limited  EWCA Civ 443.
The decision is a useful reminder that a failure to comply with formal requirements specified in a draft contract does not necessarily mean that no binding agreement has been formed: where the conduct of the parties is sufficiently clear and unequivocal, a court may be willing to find that an agreement has been accepted by conduct.
This is consistent with the Court of Appeal's recent obiter comments to the effect that a contractual provision requiring amendments to be in writing and signed by both parties will not necessarily prevent the contract being amended orally or by conduct (see this post for more detail).
Chris Bushell and Sam Waudby, a partner and associate in our dispute resolution team, consider the decision further below.