Forming a binding contract

The question of when a binding contract is formed has been re-examined in the recent case of Global Asset Capital v Aabar Block, where Global tried to enforce an oral deal surrounded by written communications which did not make the terms of the agreement clear. The case is a useful reminder of the importance of clear and consistent communications when you are negotiating, and the need for certainty when forming a contract.

The dispute concerned an alleged contract by which Global claimed Aabar had agreed to sell a package of rights and debt interests for €250 million. The claimed facts were fairly simple: Global wrote to Aabar with a purchase offer for €250million marked “without prejudice – subject to contract”.  On 6 May during or after a board meeting Aabar called Global and said they accepted the offer.  Global asked what was required to progress this, and Aabar asked Global to re-send the letter in “open and binding form”, and also to provide proof of funds.  The letter was duly re-sent by Global on 6 May.  After several holding communications, on 9 May Global supplied proof of funds but also sent a new letter of offer that contained additional terms.  On 10 May Aabar rejected the offer and ended negotiations.

Global started proceedings in June to force the sale, alleging that a binding contract had formed in the phone call on 6 May, binding Aabar to proceed with the sale subject only to two conditions: that Global re-send the letter on an open basis, and provide proof of funds. Global’s case was that they had satisfied these conditions, and so Aabar was bound to proceed with the sale.  Unfortunately for Global, it wasn’t that simple and Aabar’s summary judgment application succeeded in the Court of Appeal.

A key factor which affected the decision was the nature of communications after 6 May. The Court of Appeal upheld the principle that to decide whether a contract had been formed, they should examine the entire course of correspondence between the parties including after 6 May.  Some of Global’s communications after 6 May undermined their case:

• Communications said “Fully committed binding terms” were still due to come – suggesting what had passed so far was not binding;
• A 9 May email asked for “confirmation of acceptance of our offer”, suggesting no binding acceptance had occurred on 6 May.
• The 9 May offer letter introduced new terms, referred to a “Proposed Transaction”, was expressed to expire on 11 May, and included an exclusivity period of 15 days preventing the parties from pursuing alternative transactions with the rights.

All of these caused the Court of Appeal to decide that the 9 May letter did not merely satisfy some condition, but was in fact a new offer which was rejected by Aabar on 10 May. The Court of Appeal found that Global had no reasonable prospect of proving their case that a contract had been formed on 6 May, and struck out the their case accordingly.

This outcome reminds us of several points for good practice in negotiations:

• In many commercial transactions, once an offer is made it will be possible for the other party to accept that offer and form a binding contract immediately. This can happen orally.
• If you do not want a binding contract to form, mark your correspondence “subject to contract”, and do not then make any statements (oral or written) which suggest you are departing from that requirement.
• If you do want to make an offer capable of binding acceptance, include in the offer all the key terms to avoid uncertainty and subsequent argument.
• When you agree a contract, confirm that agreement and its terms as soon as possible in writing – ideally at the same time – so as to minimise the possibility of argument in future.
• Some contracts may require written formalities before they are binding, for example guarantees or land sales.
• When seeking to amend agreed terms, take care to ensure that this is consistent with the existing contract.
• If in doubt about the contractual situation or what to do next, seek legal advice.