“Subject to Contract” does not amount to an agreement

My colleagues Anna Sowerby and Eveline Strecker recently commented on the case of Joanne Properties Limited v Moneything Capital Limited where the Court of Appeal overturned a decision of the lower court which had found that a binding agreement had been arrived at despite communications being labelled “subject to contract” during settlement negotiations: ‘Subject to contract’ – The effect of these words in settlement negotiations.

A recent case in the Technology and Construction Court has reinforced the message that labelling communications “subject to contract” will generally prevent an agreement coming into force.

Section 108(3) of the Housing Grants, Construction and Regeneration Act 1996 states that:

“…the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement” [emphasis added].

In Aqua Leisure International Limited v Benchmark Leisure Limited the court had to decide whether the conduct of the parties amounted to an agreement so that the adjudicator’s decision was no longer binding and therefore incapable of enforcement.

Background facts

Aqua Leisure was successful in an adjudication in July 2017 in relation to an interim application for payment.  Following that decision, the parties met to discuss and agree the final settlement of the account, including release of any retention which was subsequently due to Aqua Leisure.

On 31 August 2017, agreement was reached via a telephone conversation between the principals of the parties.  This was recorded in an email exchange between the principals which was expressly stated to be without prejudice and subject to contract.

The agreed terms were for staged payments to be made by Benchmark, for Aqua Leisure to complete the “warranty works” and for a payment of £110,000 to be guaranteed by Benchmark’s parent company.  Some of these stage payments were subsequently made by Benchmark, albeit not strictly within the deadlines stipulated in the parties’ agreement.

In the interim, Aqua Leisure circulated a settlement deed and asked Benchmark to execute it.  The terms of the settlement deed did not reflect the entirety of the parties’ agreement of August 2017 and instead sought to increase the payment that the parent company was guaranteeing.   Benchmark never signed the settlement deed and on 11 May 2018 confirmed that there would be no parent company guarantee.

The sums awarded under the adjudication were not paid in full and the payments due under the staged payment regime agreed by the parties in August 2017 were also not paid in full.

Aqua Leisure therefore applied to the court to enforce the adjudicator’s decision in April 2019.

The court’s decision

The adjudicator’s decision was enforced by the Technology & Construction Court.  In doing so the judge noted that the parties had clearly agreed in August 2017 that there would be no binding contract until the terms were reduced to writing and signed off.  This was clear by the words “subject to contract” in the email communications around that time, as well as Aqua Leisure’s subsequent chasing of Benchmark for execution of the agreement.

The court held that the question was whether (after the email exchange in August 2017), the parties had agreed to enter into a binding contract (a new contract) without the need for all terms to be reduced to writing.  The court found that there nothing in the points advanced by the defendant that allowed a conclusion that a new contract was made.

The judge was not persuaded by the fact that stage payments had been made by Benchmark and that Aqua Leisure had carried out the warranty works.  The judge pointed out that in the absence of a compromise, sums were still due under the original contract and under the terms of the binding adjudicator’s award.  Payments made and work carried out was therefore not evidence of a new contract having come into existence but rather simply evidence that the parties were working together to settle debts and obligations under the original contract.

The Late Payment of Commercial Debts (Interest) Act

This case also confirmed the previous position that an adjudicator cannot award legal costs pursuant to the Late Payment of Commercial Debts (Interest) Act 1998.  The court severed the aspects of the adjudicator’s decision awarding costs, finding that the adjudicator had no jurisdiction to make such an award.

Practical tips

Due care must always be taken by parties seeking to compromise matters arising out of an adjudicator’s decision.  If communications are labelled as “subject to contract” and no formal agreement has been executed, it is likely that a court will find that the parties have not reached a binding agreement.  Until such time as a binding settlement agreement has been reached, the parties would be well advised to treat the adjudicator’s decision as binding.

Care should also be taken to carefully record the terms of any oral agreement between the parties and to then ensure that any subsequent settlement agreement accurately reflects that agreement. 

For more information please contact your usual Charles Russell Speechlys contact.