Court Can Look At Subsequent Behaviour In Disputes Over Whether Contract Had Been Entered Into

A party to a proposed contract should ensure it is clear at every stage of negotiations whether they consider a contract has been concluded at that stage or not, or risk the other party later claiming that a contract has been concluded, a recent case makes clear.

A business sent a letter offering to buy certain rights. The letter was marked ‘Without prejudice – subject to contract’.

In a telephone conversation, the offeree said it was happy with the offer subject to the company resending the offer in an open letter (ie. not ‘without prejudice and subject to contract’), and the buyer providing evidence it could raise sufficient funds for the purchase.

The buyer resent the letter as an open letter, together with a letter from an investment firm as evidence it could fund the purchase. It asked the seller to perform its part under the contract. The seller refused, arguing that no contract had yet been concluded between them.

The buyer argued that a contract had been concluded during the telephone call. It said that the concluded contract contained two conditions: the buyer had satisfied those two conditions, and the seller should therefore carry out its obligations under the contract. The buyer applied to the court for a declaration that the contract was valid and for specific performance, ie. that the contract should now be performed.

The seller argued that subsequent events showed that the buyer had not intended the telephone call to amount to a concluded contract at the time. It pointed out that the resent letter:

• Included additional terms that were not in the original letter
• Said that the buyer looked forward to receiving ‘confirmation of acceptance of [the] offer’, and that the parties could then ‘agree the mechanics of how to progress to completion’

According to settled contract law, once a contract has been concluded it is not possible to look at subsequent events when deciding how that contract should be interpreted. The buyer therefore argued that once the contract had been concluded on the telephone, subsequent events were irrelevant.

The seller argued that this test only applied when arguing about the meaning of a contract that had already been concluded, and not when the dispute concerned whether a contract had been concluded in the first place. In that instance, the behaviour of the parties after the contract had allegedly been entered into could be looked at, to see if they behaved as if they had entered into a contract.

The Court of Appeal agreed with the seller, and found that a court could, when deciding whether a contract has been entered into, consider the parties’ subsequent behaviour. This was the case whether negotiations had been in writing, oral or by conduct, or by any combination of these methods.

In this case, the Court found the following to be inconsistent with the buyer’s allegation that a contract had been concluded on the telephone:

• Its resent letter referred to the ‘Proposed Transaction’
• It used the phrase ‘Upon your agreement that you are willing to proceed…’ as the opening words to several paragraphs
• It said that the letter would expire unless accepted by the buyer within a certain period
• The additional terms contained were materially different from those in the buyer’s offer letter
• It contained a provision that neither party would pursue any alternative transactions for a defined period

The last point was considered particularly significant because it implied that the parties needed time to negotiate the terms of the contract after the resent letter had been received. This implied that the buyer did not, at the time, really consider that a contact had been concluded on the telephone, but that it was involved in continuing negotiations.

Operative date

• Now

Recommendation

• Parties to a proposed contract should ensure it is clear at every stage of their negotiations whether they consider a contract has been concluded at that stage or not, including by use of the words ‘subject to contract’ on communications

Case ref: (1) Global Asset Capital Inc (2) Glenn Maud v (1) Aabar Block S.A.R.L. (2) Aabar Investments Pjs (3) Robert Tchenguiz [2017] EWCA Civ 37