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Case law: Negotiating parties must be clear which agreed terms are intended to be legally binding, and when

Contracts law means parties to commercial contracts must make it clear which terms agreed during negotiation are intended to be legally binding (whether immediately or in future), and should record them expressly and properly in any final agreement, a High Court ruling has confirmed.

Legal Alert

This update was published in Legal Alert - December 2014

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A company carried out a demerger, with its property and trading businesses each going to a new, different owner. The parties suspected significant VAT repayments might be due in relation to the trading business.

During negotiations they agreed the new owner of the trading business should pay 25 per cent of any VAT repayments to the new owner of the property business. It was agreed that when the demerger took place this split would be made legally binding. The 75:25 split was referred to in an unsigned document described as a ‘final agreement’. However, no such provision was included in the eventual demerger agreement signed by the parties.

The company and the new owner of the property businesses argued that there was a binding contractual agreement that the owner of the trading business would pay them 25 per cent of any VAT repayment.

The High Court disagreed. It drew a distinction between parties agreeing a matter for the time being, and parties agreeing a matter with the intention that it should have the status of a legally binding and enforceable contract. It said that none of the parties intended or believed that what they discussed about VAT during the demerger negotiations was legally binding at that time. It also said that the ‘final agreement’ was not legally binding – it was merely an outline of what the parties had agreed to date. All parties expected it to be the subject of further negotiation and considered themselves free to withdraw from it at any time. In addition, the terms had not been included in the eventual demerger agreement. There was, therefore no express, legally binding agreement on this point, and none could be implied.

It also found that had there been a legally binding agreement, it would have been too uncertain to enforce, as there was no provision for the way any repayments would be split.

Operative date

  • Now

Recommendations

  • Negotiating parties should ensure it is clear which terms agreed during their negotiations are intended to have contractual force, and whether they are to take effect immediately, or at some specified future point such as upon execution of a final agreement.
  • If terms are intended to form part of the final agreement between the parties, they must ensure they are included in the final agreement, and that all legal formalities (such as execution of a written agreement) are observed.

Case ref: Barnsley v Noble [2014] EWHC 2657

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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