Commercial Contracts: Heads of Term not Binding

Negotiating complex commercial contracts can be particularly tricky, so exceptional care should be exercised. The award-winning commercial lawyers at Bahamas law firm ParrisWhittaker are highly experienced in advising commercial clients on their business contracts and negotiations.

A key ruling from the UK’s Court of Appeal¹ is a salutary reminder of the necessity to take great care when negotiation contractual terms to minimise the risk of a dispute over the final terms. The ruling has important persuasive authority on the courts in The Bahamas and should be noted.

What’s
the background?

The appeal court ruled that certain provisions within non-binding heads of terms, which were originally agreed but excluded from the final contract, were not binding. There was a dispute concerning two alleged profit share agreements linked to separate property developments in England.

In
one of these agreements, written heads of terms were indicated as ‘subject to
contract’ and without prejudice but were not signed. Most of the terms were included
in the final contract but the profit-sharing arrangement was not.

The claimants brought proceedings and claimed a share of the profits on the basis that there was a legally binding profit share agreement as recorded in the heads of term (even though it was marked ‘subject to contract’). The defendants resisted the claim saying the arrangement under the unsigned heads of term was not binding.

So how did the court approach the dispute? It said there needed to be a consideration of the position “agreement by agreement, and in chronological sequence”. When analysed this way, the court said the answers to the issues are clear.

Taking that approach, the court found no binding agreement of any sort in the terms of the unsigned head of term at the relevant time. It went further and said any argument to the contrary was hopeless for a number of reasons.

Notably, the heads of term were expressly subject to contract; and the legal requirements for a legally binding contract for the sale of land were not fulfilled in any case. Furthermore, the purchaser’s identity changed; the heads of term envisaged a further contract covering the building element (this did happen in due course); and the heads of term also made clear the parties weren’t ready to agree the terms of that building contract or binding legal obligations for various reasons.

What are the implications?

The court stated that “the use of the ‘subject to contract’ tag is of particular application to agreements for the sale of land… But it is of importance in all commercial contracts”. The practical effect of this is apparent in the above case.

This means businesses
planning and negotiating long term contractual relationships with other
organisations should take care at each individual stage of the process. If a
business specifically requires a term to be legally binding in the final
contract, resist any temptation to consider it to be implied or ‘taken as read’
that it will be binding. Instead, ensure it is specifically incorporated into
the final contractual terms.

Also, use the tag ‘subject to contract’
strategically to ensure any other parties are on notice that certain terms are
not intended, at a give point in time, to be legally binding.

How can we help?

We advise and represent a wide range of
business clients in their contractual obligations and in disputes concerning
the terms of their contracts. If you have any concerns in relation to your
contractual obligations or there is a potential claim, contact the expert commercial
lawyers at ParrisWhittaker for strategic advice and representation.

¹Farrar & Anor v Rylatt & Ors [2019] EWCA Civ 1864