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A reminder not to conflate the question of contract formation with the task of contractual interpretation

Contract disputes invariably turn on well-rehearsed principles of interpretation summarised neatly in Arnold v Britton [2015] UKSC 36, following Lord Hoffman’s restatement of the governing principles in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28.

A key principle is the limitation on admissible pre-contractual background, including negotiations, and the general irrelevance of post-contractual events when interpreting a contract.

Less common, is a dispute as to whether a binding and valid contract has even been concluded. The ingredients of a valid contract (offer, acceptance, intention, certainty and consideration) are well known but identifying them amidst an entanglement of contractual negotiations is markedly less straightforward as the case of Global Asset Capital Inc & Anr v Aabar Block S. A. R. L and ors [2017] EWCA Civ 37 (“Global” and “Aabar” respectively) has demonstrated.

In April 2015, Global offered by a letter marked “without prejudice – subject to contract” to purchase a package of rights and other debt interests. Global alleged that a valid and binding contract was concluded in a telephone conversation with the CEO of Aabar on 6 May 2015. In its claim, it sought a declaration to that effect.

The telephone call had been followed by correspondence referencing that “binding terms” and “commitments” would imminently be provided. By 9 May 2015, Aabar resent an offer letter containing additional terms, an expiry date for acceptance and an exclusivity period for further discussions.

In untangling the negotiations, the Court of Appeal found that the High Court had been wrong to conclude that the telephone call arguably represented, for the purpose of Aabar’s summary judgment/strike out application, a legally binding and enforceable contract. It had erroneously concluded it should not take account of the parties’ communications subsequent to the telephone conversation.

The Court of Appeal reaffirmed that in deciding whether a contract had been formed, the court should look at the whole course of negotiations in an effort to avoid being misled on that question: Hussey v Horne-Payne (1878) 4 App Cas 311.

In this case, use of “subject to contract” would ordinarily negate contractual intention and there was no realistic case as to how that had been waived; in any event, the subsequent communications were inconsistent with a binding contract having been concluded.

This decision is a useful illustration of the distinct tasks of establishing contract formation and contractual interpretation. The former task welcomes evidence of negotiations, both before and after the alleged formation, where they indicate whether a binding agreement was reached. Such an assessment cannot be conflated with the next question of, if so, what was agreed. The High Court plainly misled itself by adopting principles of contractual interpretation in determining the question of contract formation.

Hannah Laithwaite / 17th Feb 2017


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