Thursday, 22 July 2010

"Subject to contract": not always reliable

The words “subject to contract” are commonly used to stop a binding agreement being created, but they aren’t the end of the story. The question is whether the parties intended to create legal relations, so using those words will often show they didn’t have that intention. Where the parties contemplate making a written agreement, whether they intend not to be bound until it is signed depends on the facts.

Investec Bank v Zulman [2010] EWCA Civ 536 (18 May 2010) concerned an oral agreement to amend a guarantee. The draft amended guarantee did not contain the magic words. The Court of Appeal held that this omission did not necessarily mean that the respondents intended the oral agreement to be legally binding. Longmore LJ observed that the surest guide to the parties’ intentions was the draft documentation, and here it stated that the respondents should seek independent legal advice before entering into it. It had to be signed by them before they could be bound otherwise this provision would have been pointless: if the respondents were bound by the oral agreement: they could not have refused to sign when they received that legal advice.

Other recent cases show how much the facts determine the outcome. In Bear Stearns Bank Plc v Forum Global Equity Ltd [2007] EWHC 1576 (Comm) (05 July 2007) the Commercial Court found the necessary legal intention to be bound in an agreement to make a distressed debt trade, even though the settlement date was not agreed. Agreements of that sort were almost always concluded orally. In contrast, in Yeoman's Row Management Ltd & Anor v Cobbe [2008] UKHL 55 (30 July 2008), the House of Lords found that an oral agreement “in principle” to redevelop and dispose of property was not binding because it was insufficiently certain: various aspects of the agreement remained to be settled by future negotiations, and until these matters were settled the parties regarded each other as only honour-bound. Take care to know exactly where things stand.

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