Case law: Settlement agreements will be interpreted objectively - and can be concluded by email
Businesses negotiating a settlement of a dispute should ensure that on an objective view, it is clear at every stage whether or not the terms being negotiated are 'subject to contract'. Furthermore, settlement agreements can be concluded by email - whether or not intentionally.
This update was published in Legal Alert - May 2016
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A company sub-contracted groundworks on a development site to a sub-contractor. There was a timetable for the works, with payment by instalments, and a contractual process for dealing with disputes which included time limits.
A dispute arose but the sub-contractor failed to comply with the time limits imposed. The company refused to make a payment under the agreement.
There was an inconclusive 'without prejudice' meeting between the parties, held on the basis that any agreement reached 'would have to be put in writing and signed by the parties before it could take effect' – ie that negotiations at the meeting were 'subject to contract'. No agreement was reached either at the meeting, or in 'without prejudice' emails exchanged later that day. The sub-contractor suspended work at midnight that night.
The following day, the company sent a further email offering to settle for £2.3m. The sub-contractor replied by email that it would accept £2.35m, and if the company agreed its proposal (removing the words 'without prejudice') it would withdraw its suspension notice and return to the site. The company replied by email saying it agreed the revised proposal, but set out eight further conditions for resolution of the dispute. One condition was that the sub-contractor should provide a 'formal acceptance in writing'. It ended by asking the sub-contractor to 'please confirm your agreement to the above'.
The sub-contractor replied by email: 'Yes, we are in agreement with this now. Can you carry on formalising the paperwork? Thanks for your efforts.' The company made a deposit of monies (one of the eight conditions) and the sub-contractor returned to work at the site.
The company then emailed a formal deed of variation to the original agreement for signature, but the sub-contractor refused to sign. It said that the original condition agreed at the opening meeting - that any agreement reached would have to be put in writing and signed by the parties before it could take effect - had continued to apply even after the meeting, so all subsequent emails had also been 'subject to contract'.
Recent rulings have said that the question of whether there is a binding agreement between parties does not depend on their 'subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which the law requires as essential…'.
The company argued, in subsequent legal proceedings, that the exchange of emails on the day after the meeting amounted to an agreement to settle the dispute, so it had no further liability to pay. Looked at objectively, the emails had contained an offer to settle and acceptance of that offer, and no reasonable observer could have concluded that the parties intended otherwise. The sub-contractor had not used the term 'subject to contract' (or any similar phrase) in those emails, and had also acted as if agreement had been reached by paying the deposit and returning to work on the site following those emails.
The court agreed with the company: a reasonable business person would interpret the emails as containing a clear offer to settle, and an unambiguous acceptance of that offer. It rejected the sub-contractor's claim that the agreement at the original meeting that negotiations would be subject to contract should continue into the subsequent email exchanges. It said there was no 'reasonably cogent evidence' that this was what the parties had intended.
The reference to 'formalising the paperwork' in the sub-contractor's final email did not mean that the negotiations were still subject to contract. It simply meant that the sub-contractor expected the company to create a formal record of the agreement they had entered into.
The court was not therefore prepared to depart from the clear words of the relevant emails, which showed there had been an offer, containing all the necessary terms, and an acceptance of that offer. The fact the correspondence comprised emails made no difference – the agreement was still legally binding. To decide otherwise would be to ignore the facts that the parties were treating the whole matter as urgent, and that the sub-contractor subsequently acted as if there had been an agreement.
Businesses in negotiations to settle a dispute should:
- ensure it is clear, on an objective view, at every stage whether or not terms being negotiated are 'subject to contract';
- be aware that agreements can, in the absence of specific agreement to the contrary, be concluded by email.
Case ref: Mi-Space (UK) Ltd v Bridgwater Civil Engineering Ltd  EWHC 3360
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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