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‘Subject to contract’ and ‘subject to board approval’: Judge confirms no binding settlement agreement in arbitration dispute

10th May 2018

[2018] EWHC 1056 (Comm)

David Bailey QC and Jessica Sutherland acted for the successful defendant in this section 45 application under the Arbitration Act 1996. As the Judge (Mr Justice Males) commented: “this section is relatively little used but, as this application shows, it has a useful role to play.”

The question of law was whether an arbitration claim under a shipbuilding contract had been settled in without prejudice correspondence between the parties’ solicitors. The claimant (“the Purchaser”) contended that it had, the defendant (“the Builder”) contended that it had not.

The arbitrators gave permission for the application under section 45(2)(b) of the 1996 Act. All concerned in the arbitration had expressed concern that if the arbitrators were to consider the without prejudice correspondence only to determine that no settlement had been concluded, the arbitrators would then be faced with either having to resume the arbitration, excluding from their minds material which it would be better if they had not seen, or risk being replaced with a new and untainted tribunal. An application under section 45 avoided that danger.

Mr Justice Males held that there was no binding and concluded settlement agreement between the parties. First he held that the Builder’s Offer was an offer to settle the arbitration on terms which were subject to both (1) the approval of the Builder’s board and (2) the execution by both parties of a formal settlement agreement. Accordingly the Builder’s Offer was not an offer capable of being accepted so as to give rise to an immediately binding contract. Secondly even if, contrary to the foregoing conclusion, the Builder’s Offer was capable of being accepted, the Purchaser’s Response was not a clean acceptance of it, it was properly to be considered a counter-offer. Thirdly, the Purchaser’s Response was itself expressly subject to the Builder’s board approval and the conclusion of a formal settlement agreement. Accordingly it was not a counter offer capable of being accepted so as to create a binding contract. Fourthly, the parties’ agreement to adjourn the arbitration was not capable of being viewed as the acceptance of any such counter offer. While it is possible for parties negotiating a settlement “subject to contract” to agree by necessary implication to dispense with that subject (see Jirehouse Capital v Beller [2009] EWHC 2538 (Ch) at [38]), there was no such necessary implication in the present case. The terms in which the parties invited the arbitrators to adjourn the hearing were entirely consistent with having reached a non-binding agreement in principle but needing time to see whether they could conclude a binding settlement agreement. Fifthly, the Builder was not under an implied interim obligation to seek to seek formal approval from its Board and not to do anything which would prevent approval from being granted. Sixthly, it was appropriate to test the provisional conclusions as to whether a binding settlement had been concluded by looking at the whole course of the parties’ negotiations over the relevant period. It was abundantly clear from an objective consideration of the parties’ exchanges as a whole that there was no shared understanding that a binding settlement had been reached.

There was no settlement of the parties’ arbitration dispute.

The meaning of ‘subject to contract’ has been considered numerous times in the authorities. Mr Justice Males held that the meaning of “subject to the board approval of one or both parties” was to the same effect: “When a person concludes an agreement on behalf of a company which is stated to be subject to its board approval, he makes clear that he does not have authority, or at any rate is not prepared, to commit the company unless and until the approval is given (cf. Warehousing & Forwarding Co of East Africa Ltd v Jafferali & Sons Ltd [1964] AC 1). Since the directors are required to exercise an independent judgment whether the transaction is in the best interests of the company, it is very hard to see how there could in such circumstances be any implied promise binding the company to the effect that approval will be forthcoming or that it is a mere formality or a “rubber stamping” exercise. Even an express promise would be problematical. If the negotiator makes clear that he is not authorised to commit the company, he can hardly be authorised to commit the board of directors to commit the company. Accordingly, when an agreement is concluded which is subject to board approval, neither party is bound until the approval is given.”

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