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Contract or “subject to contract”?

Contract Document Print publication

15/01/2016

In Seeney and another v Gleeson Developments Ltd and another [1], Mr and Mrs Seeney had indicated substantial claims against Gleesons following the purchase of a defective property. The parties entered into a written agreement which provided, among other things, that Gleesons would demolish and rebuild an adjoining property for the Seeneys. One matter requiring the parties’ subsequent agreement was the cost of additions/alterations ordered by the Seeneys, referred to as “extras”.

The parties exchanged emails regarding the cost of the extras. Gleesons had engaged a mediator who confirmed to them by email that £30,000 was the figure eventually agreed. A year later, Gleesons sent the Seeneys a demand for £89,575.61 with no reference to the £30,000. The Seeneys refused to pay and ultimately sought a declaration from the court that the parties had agreed on £30,000 for extras as at the date of (and contained in) the mediator’s email.

The issue before the court was whether that agreement was binding on Gleesons (according to the Seeneys) or subject to a formal contract that was never concluded (according to Gleesons). Gleesons argued that, by reference to earlier emails, the mediator’s email should be read as if it had been stated expressly to be “subject to contract”.

The court found in the Seeneys’ favour, applying the principles summarised by the Supreme Court in the leading case on contract formation [2]. In deciding whether parties have reached a binding agreement, the court must consider their negotiations as a whole. Even if they have reached agreement on all of the terms of a proposed contract, parties may not intend to be bound until a further condition (for example, the execution of a more formal document) is fulfilled, or until some further term or terms are agreed. On the other hand, parties may intend to be bound straightaway even where there are further formalities to fulfil or further terms to agree. Whether they intend to be bound depends on an objective appraisal of their words and conduct.

In this case, the court was in no doubt that there was a binding agreement. Among the reasons given were:

  • The mediator’s email did not qualify the agreement/make it conditional in any way.
  • There was no suggestion in Gleesons’ previous emails that agreement of the extras figure was “subject to contract”. The expression was not used. Gleesons were saying that, once an agreement was reached, it would have to be recorded in a supplemental agreement (which was necessary anyway in order to deal with other matters concerning the property). Agreement of the extras figure was not conditional on the formalisation of this supplemental agreement.
  • Gleesons had made it clear that if there was no binding agreement, construction works on the property would have to be postponed. That the works proceeded following the mediator’s email was “the best possible evidence that Gleesons themselves recognised that there was a binding agreement as to the extras, which allowed them to carry on with the works“.

The same principles applied in Mi-Space (UK) Ltd v Bridgwater Civil Engineering Ltd [3], which concerned the parties to a sub-contract for carrying out groundworks at a residential development. Bridgwater Civil Engineering (BCE) made a payment application, in response to which Mi-Space failed to serve a payment notice in time. BCE attempted to enforce an adjudicator’s decision ordering Mi-Space to pay the sum claimed. Mi-Space sought a declaration that the payment dispute was settled by an email exchange between the parties before the referral to adjudication; alternatively, by that exchange and the parties’ subsequent conduct (Mi-Space paid the agreed sum and BCE returned to site).

In the email exchange, Mi-Space set out its proposal for resolving the dispute, requesting “receipt of BCE’s formal acceptance in writing of this agreement”. BCE replied, “Yes we are in agreement with this now. Can you carry on formalising the paperwork”.

Mi-Space subsequently sent to BCE for signature a formal deed of variation “capturing the agreement we have reached”. BCE returned the draft deed with amendments it hoped “would meet with Mi-Space’s approval”. The next day, however, BCE was not prepared to sign the deed.

The main issue before the court was whether, as BCE submitted, the agreement said to have been reached in the email exchange was “subject to contract” and therefore not binding. The court found in Mi-Space’s favour, so that the adjudicator’s decision was wrong and ceased to have any effect. Among the reasons given were:

  • There was no reference in the email exchange (or in previous exchanges) to the execution of a formal deed of variation or some other document requiring the signature of both parties – Mi-Space’s email contained an offer and the prescribed method of acceptance was “formal acceptance in writing”.
  • The reference to “formal acceptance in writing” was not a reference to the execution of a deed of variation/similar document signed by both parties. The submission of a draft agreement in response to Mi-Space’s email would effectively amount to a counter-offer, not an acceptance. This was not what the words meant anyway. “Formal acceptance” meant a clear and properly recorded acceptance (email would suffice, unlike conduct or a telephone call).
  • Mi-Space’s email covered all the matters in dispute, was expressed in clear terms and contemplated a prompt response enabling BCE to return to site and Mi-Space to make payment. BCE’s response was a clearly recorded and unequivocal acceptance.
  • The “subject to contract” argument was an afterthought advanced by BCE having reflected on the bargain it had made.

WM Comment

These cases highlight how crucial it is to communicate your intentions clearly when negotiating with other parties. If you do not intend to be bound until a formal document is signed or further terms are agreed, it can be helpful to expressly and prominently label correspondence and draft agreements as “subject to contract”. This includes email correspondence. Even stronger disclaimer language could be used when appropriate, for example “we have no intention to enter into a binding agreement until both parties sign an agreement in writing”.

“Subject to contract” or equivalent language is a strong indicator that parties do not intend to be legally bound, but it is not conclusive. It is important to remember that a court will look at all of the parties’ words – and conduct – when deciding whether or not a contract has been formed in a particular case. As the court noted in Mi-Space, “issues such as this are notoriously fact-specific“. It is therefore important to ensure that your conduct is consistent with your language. For large organisations, ensure that different teams are aligned to the position – so that, for example, operational teams behave consistently with the procurement teams if a contract is not yet meant to be binding.

Equally, before committing resources and expenditure to perform a particular transaction, be clear that the other side have themselves committed to their side of the bargain. There is no harm in seeking a further exchange of emails for absolute clarity that a binding agreement has been reached.

For guidance on the application and effectiveness of “subject to contract” or other disclaimer language, or on any other issues arising from these cases, please contact Gwendoline Davies or Jules Harbage.

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[1] [2015] EWHC 3244 (TCC)
[2] RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Company KG (UK Production) [2010] UKSC 2014
[3] [2015] EWHC 3360 (TCC)

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