Commercial Contracts: when is subsequent behaviour relevant?

Commercial Contracts: when is subsequent behaviour relevant?

The subsequent behaviour of one party could, in limited circumstances, be useful in resolving a dispute involving a purported commercial contract.  The specialist commercial litigation lawyers at Bahamas law firm ParrisWhittaker are highly experienced in successfully representing parties in commercial disputes.

It is an accepted principle in contract law that the subsequent behaviour of the parties cannot be used to interpret a commercial contract.  However, what if it is alleged that no contract actually exists?  An important case in the Court of Appeal in the UK shows that subsequent behaviour can be used where the actual existence of a contract is in issue.

What’s the background?

A business sent a ‘without prejudice’ letter offering to buy certain rights. The letter was also marked ‘subject to contract’.  The ‘seller’ indicated it was happy with the offer but requested the letter to be sent in an open letter, together with evidence showing it could funds the purchase.

The buyer did so, sending a letter from an investment firm as evidence it could fund the purchase. The buyer then asked the seller to perform its part under the contract but the seller refused on the basis that no contract had yet been concluded.

The buyer argued that a contract had been concluded during the telephone call, but the seller refuted this, arguing that subsequent events showed that the buyer had not intended that a contract would be concluded at the time of the telephone call.  In particular, the letter that was resent contained additional terms; and it also said that the buyer looked forward to receiving ‘confirmation of acceptance of [the] offer’ – and the parties could then decide how the matter would be progressed to completion.

What did the court decide?

The Court of Appeal found that the parties’ subsequent behaviour could be considered when deciding whether a contract has in fact been entered into at all.  In doing so, the Court decided a number of facts were inconsistent with the buyer’s argument that a contract had been concluded on the telephone

The Court found, for instance, that the resent letter contained additional terms that were materially different to those in the original offer letter.  It also referred to the ‘Proposed Transaction’.  Notably, the resent letter also included a provision that neither party would pursue any alternative transactions for a defined period.  This was key because of the implication that both needed time to negotiate the actual terms of the contract before concluding the contract.  

Commercial parties must, therefore, ensure that when negotiating a contract they are absolutely clear at each stage whether they consider a contract has been concluded.  It is commercially sensible to include the words ‘subject to contract’ on communications until the time comes when it is intended to conclude a contract making it legally binding.   If there is any doubt as to the existence of a contract, subsequent behaviour could be used to determine whether a contract exists.

How can we help?

Award-winning Bahamas law firm Parris Whittaker represents the highest standards of commercial litigation.  If you have any concerns or are in a dispute involving commercial contract terms, contact the expert commercial litigation lawyers at ParrisWhittaker for specialist advice.

1Global Asset Capital Inc & ors v (Aabar Block SARL & ors [2017] EWCA Civ 37