We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
21 February 2017
In Global Asset Capital, Inc v Aabar Block SARL(1) the Court of Appeal found that the High Court had erred in its finding that, in assessing whether a contract had been concluded, it need not take account of inconsistent subsequent communications between the parties following the arguable conclusion of a contract during a telephone call that had followed a 'subject to contract' offer letter.
The appeal arose from a claim brought by Global Asset Capital, Inc against Aabar Block SARL in June 2015 for enforcement of a contract that it alleged had been entered into between the parties on May 6 2015, pursuant to which Aabar agreed to sell Global a package of rights and other debt interests for $250 million. Global sought a declaration that the contract was valid and specific performance of the terms of the contract.
At first instance, Aabar applied for summary judgment of the claim on the basis that Global's claims had no real prospect of success. The court dismissed the application for summary judgment and Aabar appealed.
In coming to its judgment, the Court of Appeal considered the following timeline, which was agreed by the parties for the purpose of the appeal:
The Court of Appeal considered whether the High Court was wrong to conclude that:
Should subsequent communications be considered?
The Court of Appeal revisited established principles in considering whether subsequent communications should be considered when assessing whether a contract had been formed. Referring to Hussey v Horne-Payne,(2) it confirmed that when deciding whether a contract has been made, the court will look at the whole course of negotiations. The rationale for this approach was articulated in Hussey: that is, focusing on one part of the parties' communications in isolation, without regard to the whole course of dealing, can give a misleading impression that the parties had reached agreement when they had not.
The Court of Appeal also confirmed that authority establishes that this rationale applies regardless of whether the negotiations are conducted in writing, orally or by conduct (or by a combination of these).
The Court of Appeal also considered the relevance of subsequent communications to the interpretation of a contract once formed. It confirmed the established principle that one "cannot interpret the meaning of words used in a contract by reference to what happened later". Similarly, once the contract is formed, further negotiations cannot "get rid of the contract already arrived at" without the consent of both parties. However, in this case the court was considering the primary issue, which was whether a contract had been formed in the first place.
Consequently, on the first issue, the Court of Appeal found that the High Court had erred in concluding that it would not take account of subsequent communications when considering whether a contract had been made on May 6 2015.
Did Global have a real prospect of establishing its case that the contract had been concluded?
The Court of Appeal considered whether, even if the subsequent communications were ignored, Global could establish that the contract had been concluded during the telephone conversation on May 6 2015. It concluded that Global could not.
Global's primary pleaded case was that the offer set out in the offer letter had been accepted on the telephone by Aabar's representative. However, the fact that the offer letter had been marked "without prejudice – subject to contract" was effectively the final nail in the coffin for this argument. The Court of Appeal referred to well-established principles that dealing on a 'subject to contract' basis negates contractual intention,(3) in effect rendering the offer incapable of being accepted.
Global put forward an alternative analysis that Aabar had made an oral offer that it was prepared to sell the package of rights and debt interests on the terms of the offer letter subject to satisfaction of the conditions, which had been orally accepted by Global. The Court of Appeal did not accept that this was Global's pleaded case; and even if it were, there was nothing to show that the words used during the telephone conversation could have amounted to an offer and acceptance.
Further, there was nothing to show any intention that the 'subject to contract' status of the dealings had been waived. The agreement to waive this status must be unequivocal. The fact that there was a condition to resend an offer in "open and binding" terms was held to be inconsistent with there already being an agreement in open and binding terms.
Taking into consideration the subsequent communications, it became clearer that no contract had been concluded on May 6 2015. The offer letter sent on May 9:
All of this pointed to the fact that the offer letter could not have been accepted.
On the second issue, the High Court had erred in concluding that Global had a real prospect of establishing that the contract was made on May 6 2015.
Did Global's case that the conditions were satisfied have real prospects of success?
As regards the first condition, which required Global to "resend the Offer Letter in 'open and binding form'", the Court of Appeal found that Global had no real prospects of succeeding on its case that the condition had been satisfied: 'resending' meant that the same letter should be sent again; however, there were materially different terms in the May 9 letter which created a new offer and the May 9 letter was stated to be "subject to" agreement on final form documentation, which meant that it did not fulfil the requirement that it be "binding".
As regards the second condition, which required "satisfactory evidence of an ability to fund the transaction", the funding letter did not provide satisfactory evidence. The funder's intention to provide funding was subject to a number of matters, including due diligence. As such, it was a non-binding indication of a potential ability to fund the transaction, not an actual ability. This was not "satisfactory evidence" on either an objective or subjective basis.
The Court of Appeal therefore concluded that Global had no real prospect of showing that the conditions were satisfied.
While the Court of Appeal's decision confirms established principles about the significance of the whole course of dealings when establishing whether a contract has been formed, and the effect of denoting such dealings as 'subject to contract', it serves as a timely reminder of how to progress contractual negotiations so as to avoid uncertainty and potential disputes later on.
In order to avoid any uncertainty about the point at which a contract has been formed, all relevant pre-contractual correspondence and drafts of contractual documentation should be marked "subject to contract". The Court of Appeal's decision is a reminder that this status can only be waived if there is an unambiguous agreement between the parties to do so.
For further information on this topic please contact Emma Griffiths or Geraldine Elliott at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.