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 [2017] 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.

Background

The claimants alleged that on 6 May 2015 the defendants entered into a contract to sell them a package of rights and other debt interests for €250 million. The claimants sought a declaration that the contract was valid and an order for specific performance. The defendants applied for summary dismissal of the claims on the basis that the claimants had no real prospect of successfully establishing that a contract had been concluded. The High Court (Mr Justice Walker) dismissed the application for summary dismissal and the claimants appealed.

For the purposes of the appeal the parties accepted the following version of events:

  • On 23 April 2015, the claimants sent the defendants an offer letter which was marked "Without Prejudice – Subject to Contract".
  • On 6 May 2015, during a telephone call, a representative of the defendants stated that they accepted the offer subject to the claimants (a) resending the offer letter in "open and binding form", and (b) providing satisfactory evidence of their ability to fund the transaction.
  • On 7 May 2015, the claimants texted and emailed the defendants stating that they would provide "binding terms and funding commitment" later that day or the following day.
  • On 9 May 2015, the claimants sent the defendants another offer letter which repeated the key commercial terms of the original offer but also included various additional and different terms. The cover email stated that the claimants looked forward to receiving confirmation of acceptance of the offer.
  • On 10 May 2015, the defendants responded stating that the offer was not accepted.

Decision

The Court of Appeal allowed the appeal and entered judgment for the defendants. It held that Walker J had erred in finding that:

  • he should not take account of the parties' communications following the 6 May 2015 telephone call when considering whether a contract had been made on that date;
  • the claimants had a real prospect of establishing that the contract was made on 6 May 2015; and
  • the claimants had a real prospect of establishing that the conditions to the contract were satisfied (this point is not considered further in this post).

Consideration of subsequent communications

The Court of Appeal reiterated the well-established principle that, when deciding whether a contract has been made during the course of negotiations, the court will look at the whole course of those negotiations. Focusing on part of the communications in isolation could give the misleading impression that the parties had reached an agreement when in fact they had not. It confirmed that this applies regardless of whether the negotiations are conducted in writing, orally or by conduct or by a combination of those means.

While the court will not consider subsequent events when interpreting the words used in a contract, the issue in the present case was not one of interpretation but whether a contract had been made. Similarly, once there is a complete contract, further negotiations between the parties cannot get rid of the contract without the consent of both parties, but here the court was dealing with the prior question of whether there was in fact a complete contract.

Whether there was a concluded contract

The Court of Appeal held that, even ignoring the parties' subsequent communications, the claimants had no real prospect of showing that there had been a binding offer and acceptance during the telephone call.

The offer letter sent prior to the telephone call was marked "subject to contract" which meant that it was not possible for the defendants simply to accept the offer. The Court of Appeal rejected the claimants' alternative argument that the defendants' "acceptance" of the offer should be construed as them making an offer to contract on the terms of the claimants' offer letter, subject to the two conditions referred to, which the claimants had accepted. This was not the claimants' pleaded case and they had not shown how the words used in the telephone call could be interpreted in this way.

Even if there had been an offer by the defendants, the claimants would need to show that there had been an unequivocal agreement to waive the "subject to contract" status of their dealings. The condition that the claimants re-send the offer in "open and binding terms" was inconsistent with such an agreement.

The parties' subsequent communications made it even clearer that no contract was concluded on 6 May 2015. In particular, the offer letter sent on 9 May 2015:

  • still referred to a "Proposed Transaction";
  • stated that it would expire if it was not accepted by 6pm on 11 May 2015;
  • put forward a number of materially different terms to the original offer letter; and
  • included an exclusivity period of 15 days during which the parties would not pursue any alternative transaction in relation to the rights.