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Legal update: Contract formation and termination

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We look at two recent cases highlighting Formation of a contract or settlement agreement and Termination of a contract - contractual v. common law right.

Formation of a contract or settlement agreement – Goodwood Investments Holdings Inc v Thyssenkrupp Industrial Solutions AG [2018] EWHC 1056

In this case the court had to consider whether a binding settlement agreement had been made following a series of “without prejudice” exchanges. The negotiations involved a series of offers and counter-offers, culminating in a draft settlement agreement said to be “subject to board approval” and “subject to contract”.

The Judge held that there had been no binding settlement agreement because:

1.  It is well-established that words such as “subject to contract” indicate that parties do not intend to be bound until a formal contract is executed.

2.  When a person concludes an agreement on behalf of a company which is stated to be subject to its board approval, he makes clear he does not have authority, or at any rate is not prepared, to commit the company unless and until the approval is given. Neither party is bound until the approval is given.

3. An offer which is made (i) subject to contract and (ii) subject to board approval is not an offer capable of being accepted so as to give rise to an immediately binding contract.

The case highlights the importance of ensuring that any offer to contract is capable of acceptance without further approval or formalities and if not, that those approvals formalities are completed to ensure the contract is binding.

Termination of a contract – contractual v common law right - Phones 4U v. EE[2018] EWHC 49 (Comm)

This case dealt with the consequences of termination of a contract. A right to terminate a contract can arise in two ways: (i) contractually, where the contract expressly gives the right to terminate in certain circumstances or (ii) under common law, where there is a breach of contract which entitles the innocent party to terminate.  The distinction is important because it determines what damages a party is entitled to with damages for loss of bargain being, in principle, available for common law termination but not contractual termination (unless the contract provides otherwise).  It is possible for a party to terminate in reliance on a contractual clause whilst preserving its rights to claim common law damages but that requires the terms of any termination notice to be clearly and carefully worded.

The parties entered into a contract under which the Claimant was required to pay a monthly fee.  The Claimant ran into financial difficulties which ended in the company appointing administrators and suspending trading.  Two days after, the Defendant terminated the contract.

The appointment of administrators was not a breach of contract but it was an event which gave the Defendant a contractual right to terminate, so there was no question as to whether the termination was lawful.  The question for the court to decide was whether the termination, based on a contractual right to terminate, also entitled the Defendant to damages for the loss of bargain resulting from the early termination of the contract.

Among other issues, the court considered the wording and effect of the termination notice. The notice did not (i) refer to any breach of contract on the part of the Claimant or (ii) set out any facts that might give rise to a common law right to terminate. Instead, the notice only referred to the Defendant’s contractual right to terminate for an event that was not a breach of contract. The court held therefore that the termination had been made solely in reliance on the contractual right to terminate, independent of any breach of contract, and that therefore the Defendant was not entitled to damages for loss of bargain. This was the case even though circumstances existed that would have given the Defendant a common law right to terminate too. 

The case highlights the importance of exercising the right to terminate carefully so as to avoid inadvertently losing potentially valuable claims for damages for breach of contract.

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