Heads of Term: Binding?
Businesses need to exercise caution when negotiating commercial contracts, as the appeal court found that provisions within non-binding heads of terms which were left out of the final contract were not binding.
What’s the background?
A dispute arose concerning two alleged profit share agreements arising out of two different developments in West Yorkshire. In one of them, the written but unsigned heads of terms were stated to be ‘subject to contract’ and without prejudice.
Though the majority of the terms were incorporated into the final contract, the profit-sharing arrangement was not.
However, the claimants argued that despite the ‘subject to contract’ tag, there was a binding profit share agreement as recorded in the heads of term, therefore, they were legally entitled to a share of the profits. For their part, the defendants argued that the arrangement under the unsigned heads of term was not binding.
The Court of Appeal said the correct approach as to whether or not there was a binding profit share agreement required “a consideration of the position agreement by agreement, and in chronological sequence”.
The appeal judges concluded that there was no binding agreement of any sort, at the relevant time, in the terms of the unsigned head of term. In fact, the court described the argument that there was a binding profit-sharing agreement at the time as “hopeless for a variety of reasons”.
It found:
· The heads of term didn’t amount to a binding contract in relation to the land sale and this was accepted because it was expressly subject to contract. Nor was it binding in relation to the building element.
· There was no signed written agreement as required under to section 2 of the Law of Property Act 1925 so the heads of term could not amount to a legally binding contract for the sale of land.
· The identity of the purchaser changed over subsequent months.
· The heads of term envisaged a further contract in relation to the building element would be drawn up – and that is precisely what happened.
· The heads of term also made clear the parties weren’t ready to agree the terms of that building contract or binding legal obligations because, amongst other things, the identity of the purchasers could change.
The court also rejected a further contention that a legally binding profit-sharing agreement arose thereafter by reason of the subsequent sale of the land and because a JCT contract was entered into.
What does this mean?
In his ruling, Coulson J stated that “the use of the 'Subject to Contract' tag is of particular application to agreements for the sale of land… But it is of importance in all commercial contracts”. This case demonstrates this in a highly practical way.
Negotiations of commercial contracts can, in some cases, prove complex with a number of stages in the process. It is therefore vital that the negotiating parties ensure that any provisions in what are non-binding ‘subject to contract’ heads of terms are, if this is the intention, incorporated into the final contract.
Otherwise there is the risk of expensive litigation.
1Farrar & Anor v Rylatt & Ors [2019] EWCA Civ 1864
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you