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Rayner my parade! The importance of specialist advice.
Jemma Brimblecombe
Our series focused on the settlement of disputes considers issues encountered by practitioners across a range of dispute resolution specialities. This article discusses steps that can be taken to ensure that negotiations are not binding until final terms are agreed, to protect parties from unintended commitments.
Settlement negotiations can be quite frenetic. In those whirlwind moments, as terms and qualified acceptances are hurled from one side to the other, parties ought to protect themselves with a simple phrase, so they don’t find themselves bound to an agreement without ever placing pen to paper, or e-signature to email.
That simple phrase? ‘Subject to Contract’.
What does it mean and what does it do?
As neatly summed up by Lewison LJ in Generator Developments Ltd v Lidl UK GmbH, ‘subject to contract’ means “that
(a) neither party intends to be bound either in law or in equity unless and until a formal contract is made; and
(b) that each party reserves the right to withdraw until such time as a binding contract is made."
The phrase signals that settlement negotiations will continue until each party has signed on the dotted line, or otherwise agreed and filed a consent order with the Court, reflecting their final agreed terms.
Why is that important?
The best illustration of why it is so important is what happens if it goes wrong.
In Bieber and others v Teathers Limited (in liquidation), an email exchange regarding settlement terms did not include an indemnity to protect the defendant from third party claims, although the subsequent long form settlement agreement did. The email exchange was not expressly ‘subject to contract’. As such, when considering the whole course of the negotiations (including the defendant’s failure to reserve its position regarding third party claims in the email exchange), the Court held that it was the email negotiation between the parties’ lawyers which represented the final binding settlement, rather than the long form agreement produced after the negotiation was complete. That made a significant difference to the defendant who was left unprotected from third party claims.
Marking negotiations “subject to contract” can also protect a party where negotiations have not finished. In Joanne Properties v Moneything, the Court of Appeal overturned a decision to allow a consent order, which had been filed by one party, where the counterparty was adamant terms had not been agreed.
After the parties had agreed on how funds would be ‘ring-fenced’, but before they had reached an agreement on the distribution of those funds, the defendant’s solicitors provided a draft consent order, which expressly dealt with the distribution. Having chased and received no comment, the defendant’s solicitor sent a letter confirming that an application would be made for an order on those terms, unless the consent order was agreed by the following week. The defendant subsequently made the application and filed the draft order with the Court.
The Court of Appeal rejected the High Court’s decision that a binding agreement was in place;
“the [High Court] judge seriously undervalued the force of the "subject to contract" label on the legal effect of the negotiations… where negotiations are carried out "subject to contract", the mere fact that the parties are of one mind [regarding settlement terms] is not enough. There must be a formal contract, or a clear factual basis for inferring that the parties must have intended to expunge the qualification. In this case there was neither.”
Overall
Ultimately, if the parties’ best interests are served by settlement, total clarity on what the agreed terms of any settlement are and when it will become binding is vital to reaching a sustainable, durable agreement.
The best way of providing that clarity will always be by ensuring that settlement negotiations explicitly take place under the auspices of ‘subject to contract’.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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