A series of oral and written exchanges over a period of time have to be looked at objectively to determine whether any agreement has been reached.

In Destiny 1 Ltd v Lloyds TSB Bank PLC, the parties entered into negotiations in relation to the provision by Lloyds of a guarantee to Destiny's wholesalers so that it could purchase stock, an overdraft facility and a refinancing of its existing debt. Security was to be given by a debenture over Destiny's assets, a personal guarantee from the individual that owned Destiny (K) and charges over properties owned by him. Lloyds confirmed to K that it would provide the guarantee, subject to certain conditions to which K agreed in writing.

The personal guarantee and the debenture were executed but Lloyds subsequently decided not to refinance Destiny's debt and the whole transaction collapsed. Destiny sought damages for breach of contract as it alleged K's agreement to Lloyds' conditions regarding the guarantee to the wholesalers had given rise to a binding agreement to issue that guarantee. Lloyds' failure to enter into the guarantee had caused it loss. Lloyds argued that its letter in relation to the guarantee had set out the conditions on which the guarantee would be issued if and when all the other elements of the financial package were agreed.

The Court of Appeal, finding in favour of Lloyds, held that where there is a series of oral and written exchanges over a period of time, they have to be viewed as a whole when determining whether agreement has been reached or not.

The negotiations had to be looked at objectively. It was clear that throughout the discussions and correspondence, the parties were intending to reach agreement on a package of financial measures, not just the guarantee. They were all inextricably linked. The fact that K's personal guarantee and the debenture had been executed by the time Lloyds pulled out did not mean an agreement had been reached. These were simply steps taken towards the completion of the arrangements.

Things to consider

When determining whether a contract has been formed, the courts will look at all the circumstances objectively, rather than at each party's subjective intention or understanding. Here, the reasonable person would have understood the communications to relate to the whole package, rather than to individual elements. If there was no agreement on the whole package, there was no agreement, or contract, at all.