Commercial Contracts: ‘Subject to Contract’ Correspondence & Subsequent Conduct

Commercial Contracts: ‘Subject to Contract’ Correspondence & Subsequent Conduct

When is a purported contract not a contract? Disputes sometimes arise when one contractual party insists there is a legally binding contract in place, but the other party says there is no contact.  The specialist commercial litigation lawyers at Bahamas law firm ParrisWhittaker are highly experienced in successfully acting for clients involving all kinds of commercial disputes.

The UK’s Court of Appeal (CA) has ruled1 in an important case where one party requested an offer letter to be resent, but without the words ‘without prejudice - subject to contract’ – then argued that a contract had arisen once it had been sent to the other party.  Unusually, the CA looked at the parties’ subsequent behaviour in reaching its decision.

What’s the background?

A business (the buyer) sent a letter marked “Without prejudice – subject to contract”, offering to buy certain rights.  The other party (the seller) said, in a telephone conversation, said it was happy with the offer subject to it being resent in open letter, together with evidence showing it could raise sufficient funds for the purchase.

The buyer did as requested and then asked the seller to perform the contract.  The seller refused on the basis that there was no contract – they had not yet concluded one.  The buyer asked the court for a declaration that the contract was valid and requested specific performance by the seller.

The seller relied on events subsequent to the telephone call to show no contract had been concluded, particularly that the second, open letter included additional terms that were not in the original letter.  Furthermore, that 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’

The buyer argued that subsequent events were irrelevant because contract law says that once a contract has been concluded, it is not possible to consider subsequent events when deciding how that contract should be interpreted.  However, the seller successfully argued that this principle only applied where it was not disputed that a contract had already been concluded: it did not apply where the dispute concerned whether or not a contract had been concluded.

The CA found a number of facts to be inconsistent with the buyer’s arguments, including:

• 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

A contract had clearly not been concluded and the buyer failed in its claim.

What does this mean?

Commercial parties to a proposed contract ensure they are clear as to when a contract has been concluded.  There can be no ambiguity and no uncertainties about any terms agreed or yet to be agreed, otherwise it is likely a contract has not in law been created.  Relying on open letters as evidence of a legally binding contract will not be sufficient proof of a contractual relationship in law.

Businesses must conduct their negotiations carefully to avoid any doubt as to whether or not a final contract has been concluded.

How can we help?

Commercial contract terms can raise many difficulties and lead to disputes if there is insufficient clarity as to terms.  If you are involved in a commercial dispute involving your commercial contracts take expert advice from the award-winning Bahamas law firm ParrisWhittaker. 

1Global Asset Capital Inc & Glenn Maud v Aabar Block S.A.R.L., Aabar Investments Pjs & Robert Tchenguiz [2017] EWCA Civ 37