Aqua Leisure International Ltd v Benchmark Leisure Ltd: Settlement “subject to contract” does not prevent Adjudication enforcement

The Technology and Construction Court (TCC) have enforced a decision made by an adjudicator on the grounds that the terms of a settlement arrangement agreed between the parties, which would have superseded the adjudicator’s decision under Section 108 (3) of the Housing Grants, Construction and Regeneration Act 1996 (the ‘Construction Act’), was not binding as it was “subject to contract.”

Background

Benchmark instructed Aqua to carry out building works at a water park and the parties entered into a standard form of JCT Design and Build Contract. Following completion of the building works under the contract, Aqua issued a final interim payment application. Benchmark did not pay the full sum and no pay less notice was served. Aqua subsequently issued adjudication proceedings for the outstanding sum due from the final interim payment application and the adjudicator found in Aqua’s favour. However, the sum awarded did not represent the full amount due to Aqua under the contract, as there was a retention payment still outstanding. Therefore, the parties entered into negotiations in an attempt to reach a compromise on all the outstanding matters under the contract.

During negotiations, the parties reached a compromise which was documented in a series of emails. Part of the compromise reached was that Benchmark would make several payments (the ‘payment resolution’) to Aqua and provide a guarantee. The payment resolution was expressed to be “without prejudice and subject to contract”. Further, once Benchmark agreed to the payment resolution, Aqua confirmed they would contact their “lawyer to draft the settlement and guarantee wording” and forward this “as the binding agreement once signed by all the parties”. Aqua subsequently sent “a deed of settlement and payment guarantee” to Benchmark to review and execute. Despite chasing Benchmark on numerous occasions and re-sending the deed to them several times, Benchmark did not sign the deed, however they did make a number of payments to Aqua.

Benchmark did not pay the full sums due under the adjudication or under the payment resolution. They also did not provide a guarantee or sign the settlement deed and therefore Aqua commenced proceedings to enforce the adjudicator’s decision in full.

Benchmark argued that the parties had reached a settlement which superseded the adjudicator’s decision and therefore it could not be enforced. They further argued that the “subject to contract” condition had been waived as the parties conduct suggested that they considered themselves to be bound by the payment resolution. For example, Aqua had requested compliance with the terms of the settlement and had issued credit for payments received without the deed being signed. Therefore, the requirement that the agreement had to be in writing in order to be binding was a mere formality and the parties always intended to act upon and be bound by the agreement reached. Aqua disputed Benchmark’s position submitting that the settlement agreement was clearly “subject to contract” and therefore it was not binding until it was reduced to writing, or, in the alternative, the settlement was conditional upon Benchmark providing a guarantee (neither of which happened).

Decision

The law governing the phrase “subject to contract” is documented in various case law. In Generator Developments Ltd v Lidl UK GmbH, Lewison LJ said, in general, that this phrase means neither party intends to be bound by an agreement unless a formal contract is made and as such, either party can withdraw from such an agreement at any time beforehand. In the case of RTS Flexible Systems Ltd v Molkerei , Lord Clarke said “Whether in such a case the parties agreed to enter into a binding contract, waiving reliance on the “subject to [written] contract” term or understanding will again depend upon all the circumstances of the case, although the cases show that the court will not lightly so hold.”

The TCC applied these authorities when considering whether the parties had in fact entered into a binding contract, thereby superseding the adjudicator’s decision under Section 108 (3) of the Construction Act, which provides that an adjudicator’s decision is binding until the dispute is determined by legal proceedings, arbitration (if applicable) or by agreement.

The TCC concluded that although they agreed that the parties had reached some form of agreement, it was held that there was a common understanding between the parties that the agreement reached was not binding until the terms were reduced to writing and signed off i.e. the “subject to contract” clause meant that neither party was bound in law until and unless a formal contract was executed. The mere fact of conduct consistent with the intended agreement occurred was not sufficient to demonstrate a legally binding agreement. In the absence of a formal contract, the agreement was not binding on the parties and therefore Aqua had the right to enforce the adjudicator’s decision.

This case reminds us of the importance of ensuring that any agreement reached between parties which is marked “without prejudice and subject to contract” should be formally executed. As this case confirms, a court will conclude that in absence of a signed formal contract, even if performance has been carried out, such an agreement is not binding on the parties which means either party can “back out” of it.

For more information on the article above contact Miriam Soteriou and Lianne Edwards.