Case law: Settlement terms offered 'subject to approval by our board of directors' not legally binding
Businesses negotiating agreements should ensure that terms offered by the other party are not subject to a proviso requiring approval by the other party's board of directors, otherwise they risk the other side arguing they are not legally bound by those terms until the proviso is satisfied.
This update was published in Legal Alert - September 2018
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During an arbitration dispute over a contract to build a yacht, the parties discussed settlement terms on a 'without prejudice' basis. The boatbuilder made an offer in full and final settlement on terms set out in a draft agreement. However, it said the agreement was subject to the prior approval of its board of directors.
The client accepted the offer, but the boatbuilder then sent a draft agreement containing significantly different terms.
A contract is concluded in law when there has been an offer from one side, acceptance of that offer by the other side, and 'consideration' (eg, payment from one side to the other). There must also be an intention to create legally binding relations.
The client claimed the boatbuilder had made an offer, which it had accepted, so there was a binding contract on the terms of that offer. It relied on previous decisions that parties could make a legally binding contract - even if it was agreed that the parties would subsequently sign a formal document setting out its terms, and even if it were possible for that document to contain additional terms not yet agreed.
The High Court said that the question of whether the parties had reached a binding agreement should be judged in the context of what they said and did during the whole course of their negotiations.
In this case, it said that the condition in the offer - that it was subject to the board approving a draft agreement - had the same effect as making the offer 'subject to contract'. It showed that the negotiators for the boatbuilder did not intend to create legal relations until the board had approved the offer. It was tantamount to saying that either the negotiators did not have authority to bind their company or, if they did, they were not committing the company to the agreement until it had been put to the board.
Nor could the client argue that there was an implied promise that the board would rubber-stamp the offer. Directors making decisions, such as whether to approve a proposed settlement agreement, are subject to a number of company law duties such as to promote the success of the company, so negotiators are clearly not able to promise the board will approve such an agreement in advance.
This meant there was no legally binding contract at the time the client said there was.
- Businesses negotiating agreements should ensure that terms offered by the other party are unconditional - and not subject to provisos such as requiring approval by the other party's board of directors - before they accept them, or risk the other side arguing that they are not legally bound by those terms until the condition is satisfied
Case ref: Goodwood Investments Holdings Inc v Thyssenkrupp Industrial Solutions AG (M/Y PALLADIUM)  EWHC 1056
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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