Legal Briefing

High Court finds that ‘subject to contract’ banner does not necessarily prevent parties being bound by agreement

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Corporate and commercial | 01 December 2009

IN JIREHOUSE CAPITAL & ORS v BELLER & anor [2009] the parties were conducting settlement negotiations and although they had not expressly lifted the ‘subject to contract’ banner (in fact both sides used it fastidiously through their various exchanges) the High Court found that, on the facts, the parties’ negotiations could only be understood to have been conducted on that basis (ie not intending that any formalisation was required for the parties to be bound). As such, the banner having been lifted, the parties were bound by the terms agreed despite the absence of any more formal contractual agreement.

Jirehouse: Facts

The parties were involved in proceedings in related cases both in the Chancery Division (CD) and in the Queen’s Bench Division (QBD). The litigation was listed with the courts in a five-day window starting on 29 June 2009 and was estimated to run for 13 days.

As often happens in commercial litigation, just before trial the parties decided to attempt settlement. On 23 June 2009, discussions began between the parties legal representatives, which were then followed up by an exchange of e-mails.

An e-mail from the defendant’s counsel on 24 June 2009 was marked ‘without prejudice’ and contained the following wording:

‘It does not represent an offer capable by acceptance of becoming contract or settlement. Clearly any settlement whether it incorporated all or any of the four terms needs to be carefully drafted and for that reason the terms of this e-mail should be treated as subject to contract terms.’

The claimant’s representative replied on the 25 June 2009 with an e-mail, also headed ‘without prejudice’, that contained a statement very similar to the above, indicating agreement of all but one of the terms, subject to contract.

Further work on the settlement took place over the subsequent weekend and, on 28 June 2009, draft orders were produced by the claimants and sent to the defendants. The defendants’ counsel replied the following day stating that the proposed wording was not acceptable and putting forward a revised order (the e-mail was marked ‘without prejudice and subject to contract’). The e-mail indicated that the client would sign the order, but also included the phrase:

‘Needless to say there is no settlement until all the documents are executed.’

Further e-mails were exchanged, all marked ‘without prejudice’ and ‘subject to contract’ and a final telephone discussion took place, at the end of which the legal advisers expressed satisfaction at having reached a settlement for their clients. Counsel for both sides stepped down, indicating that it was believed that a settlement had been achieved.

The following day the claimant’s legal adviser sent two more e-mails, the second of which attached further draft settlement documentation for final consideration, stating that all terms had been agreed.

dispute emerges

On 3 July 2009 the defendant claimed that a consent order should have been produced in relation to the QBD action by 30 June 2009 and, in light of the fact that this had not occurred, the action was no longer settled. In response to this, the claimant sought to argue that they had a ‘reasonable time’ to produce a consent order.

Issues to be decided

It was clear from the documentation that there was no question of the ‘subject to contract’ banner having been expressly lifted by either party. The issue for the judge therefore was whether or not the umbrella had been impliedly lifted so that the action was settled in negotiations on 29 June 2009 in a way that meant that the terms agreed were binding without being incorporated into a formal document.

The judge was satisfied that terms had been agreed, but the question remained as to whether or not the negotiations took place under the ‘subject to contract’ banner, meaning that the agreement did not, at that point, bind the parties. The judge found that the e-mails exchanged on 29 June 2009 had, by implication and necessity, lifted the ‘subject to contract’ umbrella so that the parties were found to be bound by the terms agreed.

The judge gave the following reasons for this finding:

  1. The claimants’ counsel, who was negotiating on behalf of their client with authority to negotiate a final settlement, was not alive to any subject to contract restrictions during these final negotiations (despite wording used in the e-mails). The judge was satisfied with evidence given stating that, as far as counsel was concerned, the terms negotiated would have binding effect and that subsequent incorporation into a written document was not, in their mind, required to achieve this.
  2. Both the claimants’ counsel and the solicitor for the defendant were anxious to achieve finality on the evening of the 29 June 2009, and both afterwards believed that they had done so.
  3. The parties also acted afterwards as though settlement had been achieved. Counsel for both sides stood down, the listing office was informed and counsel for the claimants even accepted instructions that meant that they would not have been able to appear at the trial.
  4. The judge’s view was that when parties, shortly before a trial, instruct their lawyers to conclude a settlement, it can only be on the basis that if there is an agreement, it is a necessary implication of that agreement that any previous ‘subject to contract’ umbrella has been lifted.

Therefore, settlement had been reached on the 29 June 2009 and the parties were bound by it.

The judge went on to state that further e-mails sent after terms had been agreed and after the banner had been lifted, despite containing the phrases ‘subject to contract’ or ‘without prejudice’, were not to be taken as such. The view was that, once lifted, neither party could unilaterally reinstate the principle to remove the binding nature of the agreement that had been concluded earlier.

Conclusion

The Jirehouse decision should serve to alert all lawyers and commercial parties to the possibility that pre-contractual negotiations during which terms are agreed may, in certain circumstances, be binding, notwithstanding the use of the ‘subject to contract’ banner. When negotiating contracts of any sort it is crucial to consider the intended effect of the content of any given conversation or e-mail and the intention of the parties to be bound. There will be many circumstances where negotiations commence on one basis (ie ‘subject to contract’) and, during the course of those negotiations, it becomes necessary or desirable to alter that basis so that a legal or commercial aim can be achieved. As such, every discussion or e-mail should be considered in the context of the wider factual matrix within which the parties find themselves.

Finally, while the High Court in Jirehouse looked at the question in the context of settlement negotiations executed by lawyers on behalf of their clients, there is clearly scope for the issue to be relevant in the negotiation of mainstream commercial agreements.

Key Points

  • Despite the words ‘subject to contract’ parties may, in certain circumstances, be bound by terms agreed without formalisation of the agreement.
  • Intention and actions of the parties may justify the view that the ‘subject to contract’ banner has been impliedly lifted.
  • Commercial parties and legal advisers should consider the intended effect of each e-mail or discussion and not assume that the ‘subject to contract’ wording offers fail-safe protection.
  • Scope for this approach to apply to negotiation of general commercial contracts, as well as settlement negotiations.

By Charlotte Bunn, associate, and Frances Wacher, trainee, Edwards Angell Palmer & Dodge UK LLP.

E-mail: cbunn@eapdlaw.com;

fwacher@eapdlaw.com.