Agreement expressed to be subject to board approval not binding until approval given

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 [2018] 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.

When do you have a binding contract? It may be more (or less) often than you think

Sometimes what appears to be an agreement is not in fact binding, for example because it is incomplete or its terms are uncertain, or perhaps because the necessary contractual intention is lacking.

Conversely, a binding agreement might be reached despite appearances to the contrary, for example where parties commence work before a formal agreement is signed.

In this first of our series of contract disputes practical guides, Tim Parkes, Chris Bushell and Robert Moore consider the problems that can arise and some practical steps that can be taken to minimise the risks. Topics covered include "subject to contract" negotiations, heads of terms and agreements to agree. You can click here to download the PDF guide.

Clients and contacts of the firm can also register to access the archived version of our webinar exploring these issues by contacting Jane Webber. The webinar lasts an hour and qualifies for one CPD point.

If you would prefer the 8 minute version focusing on key practical tips, Chris has also presented this short podcast.

Upcoming webinars: freezing orders, class actions and contracts

Over the next few weeks we will be delivering a number of disputes-related webinars for Herbert Smith Freehills clients and contacts, including on: what to do when you’ve been given notice of a freezing order; the increasing risk of class actions in the UK; and how to know when you have a binding contract.

In relation to freezing orders, on Tuesday 9 June Robert Hunter will consider a string of decisions in recent years which have clarified much of the uncertainty as to what freezing orders actually prohibit, and will offer practical advice to those who want to know what they can do after being served with a freezing order.

In relation to class actions, on Thursday 18 June Kim Dietzel, Damian Grave, Kirsten MasseyMaura McIntosh, John Ogilvie and Gregg Rowan will look at a number of current developments which, taken together, increase the potential for large group actions to be brought in this jurisdiction, including competition law claims, securities claims, and claims arising out of human rights and environmental issues, and will consider what businesses can do to manage or mitigate the risks.

In relation to contracts, on Monday 22 June Tim Parkes, Chris Bushell and Robert Moore will look at the requirements for a binding contract and the problems that can arise when what appears to be an agreement is not in fact binding, or vice versa, and look at some practical steps that can be taken to minimise the risks.

All of the webinars are 12.45 – 1.45pm BST. They are part of our series of “Soundbite” webinars, which are designed to update clients and contacts on the latest developments without having to leave their desks. The webinars can be accessed “live”, with a facility to send in questions by e-mail, or the archived version can be accessed after the event. If you would like to register for a webinar, or to obtain a link to the archived version, please contact Jane Webber. The webinars, both live and archived, also qualify for one CPD point.

A reminder of the need to be clear whether settlement negotiations are subject to contract

The High Court has held that a binding settlement was agreed in an exchange of e-mails between the parties’ solicitors despite their subsequent failure to agree formal terms: Bieber v Teathers Limited [2014] EWHC 4205 (Ch).

The decision acts as a reminder of the importance of making a settlement offer expressly “subject to contract”, where it is not intended that a binding agreement will be reached by simple acceptance. Here the absence of those words was significant, as were references to the offer being “a take it or leave it offer” and “a final gesture to reach settlement”. Even a reference in the correspondence to the offer being “in principle” did not, in the context, mean that the offer was conditional. The fact that, subsequently, the parties were prepared to negotiate the terms of a formal settlement agreement also did not mean they had not already entered into a binding agreement.

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Commercial Court finds binding contract formed even though not all terms agreed

The Commercial Court recently decided that a contract was formed for the supply of crude oil blend even though some of the core terms were subject to further negotiation: Proton Energy Group SA v Orlen Lietuva [2013] EWHC 2872 (Comm). The decision acts as a reminder that a contract may become binding even though there are still terms to be agreed. Gregg Rowan and Rory Wilson consider the case below.   Continue reading

High Court decision shows need to be clear whether settlement offer subject to contract

A recent High Court decision illustrates the importance of stating clearly that a settlement offer is intended to be subject to contract, where that is the case. Here the court found that the defendant’s letter setting out terms of settlement, “such settlement to be recorded in a suitably worded agreement”, constituted an offer that was capable of acceptance and had been accepted by the claimant: Newbury v Sun Microsystems [2013] EWHC 2180 (QB).

There was little dispute as to the applicable principles. In determining whether a contract has been concluded, the court must look at the correspondence as a whole and apply an objective test. Where it is understood that a formal document recording the terms will need to be executed, the question of whether the parties intend to be bound immediately, or only when the formal document is executed, depends on an objective appraisal of their words and conduct.

On the one disputed point of principle, the court found that where, as here, a contract is said to be contained in a document or documents, the court cannot have regard to the parties’ subsequent conduct for the purpose of considering whether those documents gave rise to a binding contract.

Ultimately each case will turn on its own facts, but here it was significant that the offer specified a period for which it was available for acceptance, and a period in which payment would be made if accepted. The judge said these factors clearly indicated an intention to put forward a binding offer. It was also relevant that the letter was not expressed to be “subject to contract”; the presence of those words would have been a clear indication that the terms were not intended to be binding, and their absence was a relevant factor indicating the contrary. Continue reading

Supreme Court rules that contract exists despite “subject to contract” provision

A case involving the impact of a counterparts clause in a draft agreement has gone all the way to the Supreme Court, which ruled on 10 March that a contract existed.

In RTS Flexible Systems v Müller [2010] UKSC 14, RTS began work on the basis of a letter of intent whilst the parties continued to negotiate the final contract. The draft contract contained a counterparts clause which provided that no contract would come into existence until each party had executed and exchanged the counterparts.

No contract was ever signed and a dispute arose. The courts treated the counterparts clause as a “subject to contract” provision. The High Court ruled that there was a contract, but on limited terms. The Court of Appeal reversed this, finding that there could be no contract until the agreement was signed. However, the Supreme Court unanimously found that the counterparts clause had been waived by conduct and that there was a contract on wider terms than those found by the trial judge. As noted by the Supreme Court, this case demonstrates the perils of beginning work without first agreeing the precise basis upon which that work is to be done – a relatively common scenario. Continue reading