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Negotiated Agreements: Binding Absent Signing

About The Author

Thomas Horton (Former Writer)

Thomas studied Law at the University of Birmingham, and graduated with a 2:1 in July 2013. In the elapsed time, Thomas has worked for law firm HowardKennedyFsi LLP as a paralegal in the property department. Thomas has also been awarded a Major Scholarship by the Honourable Society of the Inner Temple and will begin the BPTC with City Law School in September 2014.

There have been two recent decisions that have demonstrated that, despite being no formally written and signed contract, a binding agreement has been found by the court. Summarily, where there have been negotiations working towards establishing a deal, which arrive at the point where a contract is finalised, but not signed, the omission of ‘Subject to Contract’ in correspondence at that point consequently means that signing is not necessary where all outstanding issues or conditions have been fulfilled. Put simply: parties negotiating a contract should be vigilant in ensuring that something as simple as ‘Subject to Contract’ is included in correspondence to prevent them from being bound to what was believed to be a draft agreement.

In the recent case of Rowena Williams (as Executor of the estate of William Batters) v Gregory Jones (Lawtel document reference: AC0140753), Jones had entered into discussions with Batters for the purchase of Batters’ 15% shareholding in a company. Several conditions were agreed, including Jones seeking the advice of an accountant (which was fulfilled); both parties envisioned that that the agreement would be recorded in a formal written document. The contract for the purchase of the shares was drafted and finalised, but Batters died before he could sign it.

Rowena Williams, acting as the executor of William Batters’ estate, issued proceedings for damages from Jones for his failure to perform the oral agreement. The defendant submitted that the formal document was nothing more than a record of what had been agreed between himself and Batters, and therefore denied that this amounted to a binding agreement. The defendant believed that the discussions were subject to entry into a formal contract, which required the signature of each party.

At the time of Batters’ death there was no outstanding issues between the parties. The High Court held (David Blunt QC delivering the judgment) that the terms of the agreement were clear and unambiguous, no conditions remained to be fulfilled, and there had been no expression to describe the agreement as being ‘Subject to Contract’. Accordingly, the formal signature of the contract was not necessary.

Whilst at first it may seem strange for this conclusion to be reached, as the parties are the masters of their contractual fate, the reference in the High Court’s decision at [96] to Lord Clarke’s decision in RTS Flexible Systems Ltd v Molkerei Alois Mūller GmbH & Co KG [2010] UKSC 14at [45] demonstrates the court’s objective standard that that is applied:

The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.

Where the parties have agreed to all the important or essential terms of the contract, a court is likely to find that there is a contract without the necessity for a formal written and signed contract ([97] of the High Court’s judgment). Accordingly, based upon the objective assessment of the parties’ actions, it was determined:

[I]t cannot be doubted that there was no aspect of the deal, other than the execution of the documentation, which was incomplete prior to Mr Batters’ death - the accountancy advice was obtained and the prospective purchaser (namely a new company No.3) was identified on 2 September 2008, No.3 was incorporated on 22 September 2008, tax clearance was notified on 23 September 2008, and the documentation, in its final form and ready for signature, was in the Defendant’s hands by 24 October 2008. In other words there were no terms which were still not agreed, and so, on any view, there was a complete agreement before Mr Batters died.

In application of the reasonable expectations of honest sensible businessmen (see Steyn J in G Percy Trentham Ltd v Archital Luxfer [1993] 1 Lloyd’s Rep 25 at 27) to this agreement made between ‘very good friends, who, no doubt, trusted each other entirely’, and where the submission of draft agreements were not marked ‘Subject to Contract’, the agreement was completed and was of immediate and binding effect thereon. The claimant was entitled to damages in a sum equivalent to that which would have been received had the transaction proceeded (plus interest at 3%).

As the law stand, where the terms of an agreement are made ‘Subject to Contract’, the court will not ‘lightly’ (in application of Lord Clarke in RTS at [56]) hold that the parties have waived their reliance on the ‘Subject to Contract’. Given the extent of the discussions in the present case, the obligations already carried out by the parties, and their close relationship, the threshold had been reached for the court to determine that a binding agreement had been made without the signing of a formal contract. 

This threshold was similarly considered in Newbury v Sun Microsystems [2013] EWHC 2180, where the claimant argued that a binding agreement had been created when the defendant offered to settle on certain terms and those terms were accepted by letter. The defendant submitted that their letter made an offer, yet it was still necessary for the parties to negotiate other terms and conditions, and that a suitably worded document was required, and until such an agreement was made, there was no binding agreement. The “offer letter” read as follows:

Terms of the Offer

To reach a compromise between the parties, our client has agreed to make a further offer of settlement to the Claimant. The offer reflects the strength of its evidence on the QBM but does not seek to place a discount on the Claimant's assertion of revenue of $173 million.

Our client is willing to settle the entire proceedings by paying the Claimant within 14 days of accepting this offer, the sum of £601,464.98 (the "Settlement Sum") inclusive of interest by way of damages, by means of an electronic transfer into his nominated bank account, in full and final settlement of the Claim and counter-claim plus the sum of £180,000 in relation to his legal costs such settlement to be recorded in a suitably worded agreement. 

This offer is open for acceptance until 5pm this evening after which it will be automatically withdrawn without further notice to you."

This offer was accepted in an emailed letter from the claimant’s solicitors, which included the words “We will forward a draft agreement for your approval…”

Disagreements arose over which form the agreement was to take, which resulted in the claimant bringing an action against the defendant. The claimant submitted that the acceptance letter sent by email created a binding contract. It was further submitted that any ‘suitably worded agreement’ was simply a reflection of the terms that had already been agreed by their acceptance of the defendant’s offer detailed in the aforementioned offer letter.

In application of the law that has already been discussed, it is clear that the essential terms of the agreement had already been made, as Lewis J sitting in the High Court states at [21]:

[T[he [offer] letter refers to "such settlement to be recorded in a suitably worded agreement". The reference to "such" settlement is in my judgment a reference back to the terms set out in the earlier part of the paragraph. If the offer is accepted, the terms set out will constitute the terms of the settlement agreed between the parties. The reference to "such settlement" is not a reference to terms still to be negotiated and agreed.

Moreover, the defendant’s offer letter is not expressed as being ‘Subject to Contract’, and had these words been used, then it would have been clear that the terms were not yet binding upon the parties until a formal contract had been drafted and agreed. In application of the objective standard upon these findings, it was held that the execution of a suitably worded agreement was not a condition of the agreement that had been entered into following the claimant’s acceptance letter in response to the defendant’s offer letter. The agreement made was therefore binding upon the parties.

The decisions demonstrate the importance of including ‘Subject to Contract’ when in the process of making offers and negotiating agreements, otherwise there is potential for a binding agreement to have been prematurely entered into. The decisions of the High Court in each case demonstrate the inference of a binding agreement, much to the displeasure of one of the parties involved. Nonetheless, the objective standards involved provide for certainty in the law and promote due diligence between the negotiating parties, whilst still being able to consider each case upon its facts to make the inference as fair as possible.

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Tagged: Commercial Law, Contract Law

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