‘Subject to contract’ wording meant agreement was not binding, says judge

Michael Fletcher of Pinsent Masons, who specialises in litigation in England and Wales, was commenting after a judge determined that three companies had not entered into a legally-binding settlement over a dispute, despite two of the companies arguing they had done so.

Baltimore Wharf SLP (Baltimore) raised a claim under warranty against Ballymore Properties Limited (Ballymore) over a roof collapse at a nursery in London. Ballymore lodged a defence against the claim while also lodging a so-called ‘part 20’ claim of its own against WSP UK Limited (WSP). Part 20 claims are where defendants seek to pass all or some of the liability for claims they face onto another party.

In this case, Ballymore and WSP engaged in correspondence over whether to offer terms of settlement to Baltimore. The court agreed to put a temporary halt on the proceedings Baltimore had raised. Lawyers for Ballymore subsequently sent an email to Baltimore and WSP containing a draft settlement agreement, which was marked ‘subject to contract and without prejudice save as to costs’.

After lawyers for WSP and Ballymore exchanged further emails on amendments to the draft agreement, dubbed the ‘travelling draft’ in the ruling – each time with the ‘subject to contract and without prejudice save as to costs’ wording used – Ballymore’s representatives asked a lawyer for Baltimore to confirm if Baltimore agreed to the terms. Baltimore’s lawyer responded to say the settlement agreement with WSP's amends were agreed.

Baltimore provided its bank account details and Ballymore subsequently circulated an ‘execution version’ of the settlement agreement. This version did not contain the ‘subject to contract’ or ‘without prejudice save as to costs’ wording.

The next day, WSP and Ballymore executed the agreement. However, following a delay in Baltimore’s signing of the agreement, a dispute arose as to whether a legally-binding settlement agreement is in effect. Ballymore’s solicitors wrote to Baltimore and WSP and stated that the agreement was binding notwithstanding that Baltimore had not signed it. Baltimore’s solicitor contested that, arguing in response that the travelling draft made plain that the settlement was subject to contract and so was not binding until the execution version was signed by all parties. Baltimore has not signed the agreement.

In considering the case, the High Court held that there was no binding agreement. The judge considered that there was nothing to show that the ‘subject to contract’ words in the travelling draft were being abandoned by Baltimore. They said a reply "accepting" the terms of a ‘subject to contract’ agreement cannot in and of itself lead to a binding agreement.

The judge also said certain conduct by Ballymore and WSP after the alleged settlement was inconsistent with their claim that all parties believed that the matter had been settled on a binding basis. In particular, the parties continued to agree to extend the postponement of the proceedings Baltimore raised beyond its original expiry date, and they did not express surprise or disappointment when informed by Baltimore that the terms of the agreement were the subject of an internal review.

Michael Fletcher of Pinsent Masons said the decision is relevant to all corporates negotiating contracts under English law, including but not limited to settlement agreements.

“The decision is a useful reminder of the power of ‘subject to contract’ wording for parties wishing to avoid being bound too readily to an agreement,” said Fletcher. “It also serves as a reminder that when engaged in ‘subject to contract’ negotiations, it is important to understand clearly when negotiations have – or have not – ceased to be ‘subject to contract’, and to seek written clarification from the counterparty where appropriate."