This article examines the 'subject to contract' label in English law, its use to avoid premature binding agreements, and its interpretation in two recent court cases, highlighting that its effect depends on the specific circumstances.

‘Subject to contract’ in English law

Parties who are negotiating a contract may use the label ‘subject to contract’ to ensure that they do not enter into a binding agreement before they are ready to do so. This can be particularly important in English law when a binding agreement can be reached (with a few exceptions) without any particular formalities. However, the label is not unassailable and whether it has the required effect will always depend on the circumstances.

The English Court of Appeal has explained the meaning of ‘subject to contract’ as follows:

‘What it means is that (a) neither party intends to be bound either in law or in equity unless and until a formal contract is made; and (b) that each party reserves the right to withdraw until such time as a binding contract is made.’[1]

Parties may make their contract negotiations ‘subject to contract’ but then – deliberately or otherwise – waive their reliance on this so that they are bound despite the absence of a formal written agreement. On this, the English Supreme Court has stated:

‘Whether in such a case the parties agree 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.’[2]

In construction contracts, issues may arise where a contract is being negotiated ‘subject to contract’ but work begins before a formal contract is executed. On this, the English Supreme Court has stated:

‘… in a case where a contract is being negotiated subject to contract and work begins before the formal contract is executed, it cannot be said that there will always or even usually be a contract on the terms that were agreed subject to contract. That would be too simplistic and dogmatic an approach. The court should not impose binding contracts on the parties which they have not reached. All will depend upon the circumstances.’[3]

The circumstances were examined in the two cases considered below. As will be seen, in both cases the ‘subject to contract’ protection was ultimately upheld.

Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541

The Court of Appeal had to decide whether the parties had entered into a binding settlement agreement in written communications passing between their respective solicitors.

The communications reflected negotiations regarding the allocation of proceeds from the sale of land. They were variously headed ‘subject to contract’, ‘without prejudice and subject to contract’ and ‘without prejudice save as to costs’.

Eventually, Moneything sent to Joanne a written document headed ‘subject to contract’ setting out terms for the allocation of these proceeds. Some of these terms had not been previously discussed. Joanne did not reply. Moneything applied to the court for an order in those terms. Joanne replied that there had been no binding settlement because the negotiations had been ‘subject to contract’.

The judge at first instance decided that there had been a binding settlement despite the words ‘subject to contract’. One reason for this was the judge’s view that, although there remained certain administrative matters to be agreed, they were not material for the purposes of the settlement.

The Court of Appeal did not agree. It found that there was no binding settlement. It noted in particular that ‘parties could get rid of the qualification of ‘subject to contract’ only if they both expressly agreed that it should be expunged or if such an agreement was necessarily to be implied’.[4]

The Court of Appeal found that there was no express agreement that the ‘subject to contract’ qualification should be expunged and no reason why such an agreement should be implied. It found that the label ‘subject to contract’ had been used at various stages in the discussions by the parties’ solicitors who must have known the meaning of these words.

The Court of Appeal also considered that the judge at first instance had undervalued the force of the ‘subject to contract’ label; the judge had focused on whether the agreed terms were sufficiently complete to amount to an enforceable contract but this was the wrong question. The correct question was whether the parties intended to enter into a legally binding arrangement at all.

The Court of Appeal concluded ‘As the cases show, where negotiations are carried out ‘subject to contract’, the mere fact that the parties are of one mind is not enough. There must be a formal contract, or a clear factual basis for inferring that the parties must have intended to expunge the qualification. In this case there was neither.’[5]

Aqua Leisure International Limited v Benchmark Leisure Limited [2020] EWHC 3511 (TCC)

The English High Court had to decide (among other things) whether the parties had agreed to enter into a binding settlement agreement without the need for all terms to be reduced to writing.[6]

A dispute had arisen between the parties in respect of the construction of a waterpark and this dispute was the subject of an adjudicator’s award. The sums awarded did not however represent the full amount due to Aqua and so the parties met to discuss settlement of the entirety of their dealings. The settlement discussed would essentially comprise Benchmark making a series of payments to Aqua, the parent company of Benchmark providing a guarantee to Aqua, and Aqua carrying out some warranty work.

After those discussions, Aqua sent Benchmark an email recording a ‘payment resolution’ which was expressed to be ‘without prejudice and subject to contract’. The email ended with the words ‘please confirm your agreement to this settlement by return’. Benchmark replied with the single word ‘agreed’ and Aqua replied ‘meantime we will contact our lawyer to draft the settlement and guarantee wording … which [we] will forward to you as the binding agreement once signed by all the parties’.

Following this, Benchmark paid Aqua certain sums. Some of these payments were made on dates which complied with the ‘payment resolution’ and other payments were made but not on compliant dates. Benchmark did not pay all of the sums set out in the ‘payment resolution’. Aqua started warranty work.

After some, but before all, of these payments had been made, Aqua sent Benchmark a ‘deed of settlement and payment guarantee’ for Benchmark’s ‘review and completion’. In the deed of settlement, Aqua gave Benchmark credit for payments already made.

In the following five months, Aqua chased Benchmark for payment six times. Eventually, Benchmark replied to say that it would not provide a guarantee from its parent company. Benchmark had by that time not paid all of the adjudicator’s decision or all of the sums set out in the ‘payment resolution’.

The question the court had to decide was ‘whether there is a reasonable prospect of establishing at trial that the parties agreed to enter into a binding contract (a new contract) without the need for all terms to be reduced to writing.’[7]

Aqua argued that the compromise agreement was expressly made in the context that it would not become binding until it was reduced to writing (‘subject to contract’). As it was not reduced to writing, it was never binding.

Benchmark argued that the ‘subject to contract’ proviso was waived because both parties ‘obviously considered’ themselves bound by the ‘payment resolution’ and conducted themselves in reliance on that common understanding and their conduct indicated a waiver of the ‘subject to contract’ condition so that a new contract was entered into.

The judge found nothing that allowed him to conclude that a new contract had been made. He found that this was ‘a paradigm example of why the court “will not lightly hold” that negotiations and agreements are “subject to contract” had been superseded’; that the parties had agreed that there would be no binding contract until the terms were reduced to writing and signed off; the presence of an agreement that was acted on was not without more enough to indicate that the parties intended to be bound; and fundamentally ‘everything that happened during the course of the parties’ dealings with one another [including payments being made and work being performed] happened at a time when the ground rules applied [i.e., that the agreement was ‘subject to contract’].’[8]

Accordingly, there was no agreement which barred the right to enforcement of the adjudicator’s award.

The recent English case Sumitomo Mitsui Banking Corporation Europe Limited v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm) highlights that where an on demand bond is assigned and a demand then made under that bond, the beneficiary will need to be sure not only that the demand is compliant with the terms of the bond but also that the assignment was effective in the first place.

The recent English case Sumitomo Mitsui Banking Corporation Europe Limited v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm) highlights that where an on demand bond is assigned and a demand then made under that bond, the beneficiary will need to be sure not only that the demand is compliant with the terms of the bond but also that the assignment was effective in the first place.

On demand bonds

A construction contract will often require the contractor to provide security to the employer in the form of bonds or guarantees. 

On large international projects, payment under these bonds is almost always ‘on demand’, meaning that – always depending on the wording of the bond – the security provider (typically a bank, specialist surety or insurance company) is required to pay the employer a specified sum of money on the occurrence of a particular event or presentation of a particular document.

If the employer requests payment under the bond (known as a ‘demand’ or ‘call’) the security provider will generally not be obliged or entitled to obtain information about the underlying construction contract or circumstances to determine whether it should make a payment. Instead, the bond will set out the formalities with which the employer must comply before the security provider will pay the bond amount. It may even include a pro forma letter of demand the terms of which are negotiated by the parties before the bond is provided. A simple demand issued by the employer may be all that is required but, usually, a statement that the contractor is in breach of its obligations is also required. 

Absent fraud (or, in some jurisdictions, unconscionability) the security provider will be required to make payment if a compliant demand is made. The courts often require that a demand strictly complies with the bond because this is the only protection afforded to the security provider. The extent to which strict compliance is required depends on the interpretation of the bond in question.

Assignment

In English law, contractual assignment usually involves the transfer of the benefit of contractual rights from a contracting party (the assignor) to a third party (the assignee). The assignee may enforce the rights that have been assigned against the other contracting party.

There are a number of reasons why contractual rights may be assigned. In a construction context, an employer may assign its rights under the project documents – the construction contract, appointments of the professional team and any security provided by the contractor, etc – to its funder by way of security.

The right to assign a contract may be excluded altogether or qualified. A contract may provide that only one of the parties may assign, that only certain rights may be assigned, it may limit the right to assign to a class of third parties, or it may make assignment conditional upon the other contracting party giving consent. Provisions like this may appear not just in the construction contract but also in security provided by the contractor such as performance or retention bonds.

The Sumitomo case

In Sumitomo the English High Court had to consider whether purported assignments of a performance bond and a retention bond were effective and whether demands made by the assignee on both bonds were valid.

Facts

Resource Recovery Solutions Derbyshire Ltd (RRS) entered into a contraction contract with Interserve Construction Ltd (ICL) for a waste treatment facility in England. Interserve PLC (Interserve) was the guarantor. ICL provided two bonds to RRS, both issued by Euler Hermes (EH).

The first was a performance bond to protect RRS including for an ‘Insolvency Default’ of ICL or Interserve. In such event, a demand for payment of the bond should be ‘signed by a director of the Employer’. The bond defined RRS as the ‘Employer’ and provided that this term included ‘all permitted assignees under this Bond’. Pursuant to clause 8 of the bond, RRS was to repay to EH any payment in respect of a claim under the bond which was held by a court to be higher than the corresponding liability of ICL. Assignment of the bond was permitted by clause 9 ‘subject to the assignee confirming to [EH] in writing its acceptance of [RRS’s] repayment obligation’.

The second was a retention bond to protect RRS including upon the occurrence of an ‘event’ which included the appointment of administrators to Interserve. It required a demand for payment of the bond to ‘bear the signature of a duly authorised officer of the Employer’. The retention bond defined RRS as the ‘Employer’ but there was no provision that this term was to include assignees. Assignment was permitted under clause 6 but there was no restriction regarding the repayment obligation like there was in the performance bond.

RRS entered into a borrower debenture with Sumitomo Mitsui Banking Corporation Europe Ltd (SMBCE) on the same date as the performance bond. By this debenture, RRS assigned the benefit of the performance bond and the retention bond to SMBCE and gave SMBCE a power of attorney to perform any act in RRS’s name and on its behalf.

RRS sent EH for each of the performance bond and the retention bond a ‘notice of assignment and acknowledgement of receipt’. EH signed and returned the notice for the performance bond (it did not sign or return the notice for the retention bond but nothing turned on this).

Interserve subsequently entered into administration. It was not in dispute that this constituted an ‘Insolvency Default’ under the performance bond and an ‘event’ under the retention bond.

As a consequence, and shortly before expiry of the performance bond, SMBCE served demands on EH under both the performance bond and the retention bond. A director of SMBCE signed each demand twice; the first signature was for and on behalf of SMBCE and the second was for and on behalf of RRS as its attorney.

EH refused to pay the bond amounts and SMBCE brought proceedings in respect of payment.

The performance bond

In respect of the performance bond, EH argued that there had not been an effective assignment. Although the performance bond permitted assignment of the benefit of the bond, this was ‘subject to the assignee confirming to [EH] in writing its acceptance of [RRS’s] repayment obligation’ (clause 9 of the bond). SMBCE had not accepted this repayment obligation prior to the purported assignment or any time after. Moreover, EH had not agreed in writing to an assignment to SMBCE in the absence of such a confirmation.

SMBCE argued that it was not required to accept the repayment obligation before an assignment was effected. This was anyway impossible because the assignment took place on the same date as the performance bond so at that date there was neither an assignee nor a bondsman for the purposes of clause 9. Moreover, the ‘notice of assignment and acknowledgement of receipt’ which EH had signed for the performance bond was either an agreement that there was an effective assignment or a waiver of the requirement to accept the repayment obligation.

The judge rejected SMBCE’s arguments. This meant that there was not an effective assignment vis-à-vis EH and that SMBCE did not become a ‘permitted assignee’.

SMBCE therefore had to rely on its alternative case. This was that if there was no effective assignment, it was RRS which could make the claim on the performance bond and RRS had done just that, because the demand was signed by SMBCE as attorney for RRS pursuant to the power of attorney.

The judge found that the requirement in the performance bond that a demand is ‘signed by a director of the Employer’ covered a case where there was a signature by a director of a company which held a valid power of attorney from the Employer where such power of attorney extended to the execution and delivery of the notice. The demand on the performance bond by RRS through SMBCE as the holder of a power of attorney was therefore valid. Presumably, an order for payment of the performance bond to RRS could be made if RRS was joined to the proceedings.

The retention bond

In respect of the retention bond, there was no restriction on assignment comparable with that in the performance bond. It was not in dispute that the retention bond had been effectively assigned to SMBCE. The issue was instead that the retention bond did not include an express extended definition of ‘Employer’ to include permitted assignees. The question was therefore whether a demand signed by the officer of an assignee could count as a duly authorised officer of the Employer.

The judge found that it could. The retention bond specifically contemplated that it may be assigned. It must therefore have been contemplated that, post-assignment, the assignee may potentially make a demand on the bond. The retention bond was accordingly a valid demand by SMBCE as assignee. The fact that the demand was also signed by a director of SMBCE as attorney for RRS meant in any event that there was a signature of a duly authorised officer of RRS.

Conclusion

The failure to comply with the terms of the performance bond in respect of assignment would have been fatal to SMBCE’s recovery under the bond were it not for the ‘belt and braces’ approach taken by SMBCE in signing the demand on its own behalf and also on behalf of RRS under the power of attorney.

With the commercial and financial pressures of today’s world, we can expect to see more challenges to bond calls. Great care should be taken to comply with the terms of the bond both in respect of assignment and demands for payment.

In some cases, it may be possible to cure a defective demand by issuing a fresh one. However, if the bond is close to its expiry, as was the performance bond in Sumitomo, it may too late by the time the defect is discovered.

Two decades ago, unjust enrichment was described as “the Cinderella of law, barely 10 years old but growing up rapidly. Until recently unrecognised and overshadowed by the ugly sisters, Contract and Tort, Cinderella’s day has arrived.” In England a claim for unjust enrichment was initially referred to as a claim in ‘quasi contract’. This language has now been abandoned and unjust enrichment has a strong foothold in the landscape of commercial law and its role and limits are becoming more clearly defined. Despite this, it is only infrequently pleaded in construction cases and when argued it is often set out in broad terms where the facts do not support such a claim. However, this is cause of action that should not be overlooked by a contractor or employer – especially if they have claims that fall outside the four corners of their construction contract.

Two decades ago, unjust enrichment was described as “the Cinderella of law, barely 10 years old but growing up rapidly.  Until recently unrecognised and overshadowed by the ugly sisters, Contract and Tort, Cinderella’s day has arrived.”[1]   In England a claim for unjust enrichment was initially referred to as a claim in ‘quasi contract’.  This language has now been abandoned and unjust enrichment has a strong foothold in the landscape of commercial law and its role and limits are becoming more clearly defined.  Despite this, it is only infrequently pleaded in construction cases and when argued it is often set out in broad terms where the facts do not support such a claim. However, this is cause of action that should not be overlooked by a contractor or employer – especially if they have claims that fall outside the four corners of their construction contract.

The Principle of Unjust Enrichment

The principle of unjust enrichment under English law^[2] is that no one should receive a benefit at another person’s detriment without being required to pay a reasonable value for that benefit. The court needs to ask itself four questions: (a) Has the Defendant been enriched? (b) Was the enrichment at the Claimant’s expense? (c) Was the enrichment unjust? (d) Are there any defences available to the Defendant?   In the recent case of Bank of Cyprus UK Limited v Menelaou^[3] the Supreme Court applied these principles to a claim by a bank that it should have a charge over a property where the bank had lent money for the purchase of that property but had not exercised a valid charge against the owner.

The Defences

There are a number of defences to a claim for unjust enrichment.  The first, and perhaps the most significant, is that the parties’ rights and remedies are set out within a contract.  If the parties have agreed to a contract then they will be bound to the terms and conditions of that contract and the law will not permit a claim for unjust enrichment to be used to avoid the consequences of that contract.  The second defence is where restitution would be impossible; for example, where goods have been destroyed.^[4]  The third defence is where one party has changed its position following his enrichment;^[5] for example, where a party has spent the monies it received in good faith.^[6]  The fourth defence is that of illegality.

Unjust Enrichment and Construction Contracts

As stated above, a claim for unjust enrichment will fail where the rights and remedies of the parties are determined by a valid contract.  So, for example, where a variation to a contract occurs, the contractor must claim under the variation provisions of the contract.  Only in cases where there are no variation provisions in the contract or the variation falls outside of the variation provisions may a claim for unjust enrichment succeed.

In cases where there is no contract,^[7] or where the contract is subsequently held to be illegal, a claim for unjust enrichment may be successful.^[8]  However, while the construction industry is notorious for carrying out works where contracts have not been signed or where there is a letter of intent, it does not follow that there will be no contract.  Recent case law has shown that the courts are ready to construe that a contract has come into existence by conduct, even where not all terms are agreed.  In the recent case of Reveille Independent LLC v Anotech International^[9] the Court of Appeal held that there was a contract, despite the fact that a written document stated that a contract would not come into existence until the document was signed, which the parties never did.  In this case the acceptance of the contract was evidenced by the clear performance of the obligations under the contract that showed that the parties intended to be bound by the contract.

In the case of ISG Retail Ltd v Castletech Construction Ltd^[10] the court had to consider whether a claim for unjust enrichment could succeed where there had been a total failure of consideration by one party.  In this case one party was claiming back by way of restitution a deposit paid where the other party had failed to provide any consideration under the contract.  The court held that “restitution is based on unjust enrichment, and that that is a different cause of action from breach of contract… But… there is a type of breach of contract (total non-performance) that can give rise to an alternative remedy by way of restitution. There is nothing in the Scheme [for Construction Contracts] that deprives an adjudicator of the power to grant relief by way of restitution if that is an available remedy for the breach of contract in question.”

However, although claims for unjust enrichment rarely succeed where a contract is in place, the use of unjust enrichment is becoming more relevant to the construction industry.  There are a number of situations that can arise where one party may be unjustly enriched.  The first example relates to where an adjudicator or DAB awards a sum to one party which is greater than the actual loss incurred.  The recovery of the money paid can be claimed by way of unjust enrichment.  The second example is where a call is made on a bond and where the amount paid under the bond is more than the loss incurred.

Unjust Enrichment and Adjudication

Claims for unjust enrichment have been successfully made in cases relating to an overpayment made under an adjudicator’s decision.  In the case of Aspect v Higgins^[11] the Supreme Court held that a claim for the recovery of monies paid under an adjudicator’s decision could be advanced by “contractual implication or, if not, then by virtue of an independent restitutionary obligation.”   Here the claim is not being made under the construction contract but under the terms of the adjudication agreement which requires or infers that a party is entitled to re-payment if he proves that the adjudicator awarded more than was due.

In Kitt & Anor v The Laundry Building Ltd & Anor^[12] the court considered what the cause of action was where one party paid an adjudicator for its decision and that party was subsequently awarded the costs of the adjudication.   The court suggested that a claim could be made under the adjudication agreement but that if there was no contractual remedy a claim could be advanced for unjust enrichment.  The court stated that an adjudication agreement creates a tripartite contract between the parties to the adjudication and the adjudicator in respect of the latter’s fees. “The parties will therefore have agreed that, if the decision required one rather than the other party to pay the adjudicator’s fees, that party would pay those fees. Although both parties are jointly and severally liable to the adjudicator in respect of those fees, and, therefore, the adjudicator could sue either party for those fees, in logic, and in law, it must follow that, where the adjudicator has felt it necessary to sue the party which has not been ordered to pay his fees by virtue of the decision, that party must have a legal entitlement pursuant to the tripartite agreement, contractually, to recover what it has been required to pay the adjudicator.”  The court then proceeded to set out an alternative position that where two parties owe a common liability and the party who is not primarily liable to pay discharges that liability, then the paying party is entitled to reimbursement by way of a claim for restitution so as to avoid unjust enrichment.^[13]

Unjust Enrichment and Bonds

Where a party (for example, an Employer) makes a call on a performance bond which is paid by the bank then the question arises whether the other party (the Contractor) can claim part of the monies back from the Employer under the basis of unjust enrichment if it can show that the losses incurred by the Employer were less than the monies paid under the bond.  It is well established that a claim can be made under an implied term that the beneficiary will account to the other party where it has been overcompensated.^[14]  As Staughton LJ stated in the Cargill case: “The general situation as to performance bonds is that they provide that the bank or the other party giving the bond has to pay forthwith, usually on demand. But subsequently there has to be an accounting between the parties to the commercial contract.”  Recently in Wuhan Guoyu Logisitics Group Co Ltd v Emporiki Bank of Greece^[15]  Tomlinson LJ held that, in addition to a right to claim under an implied term, there was also a right to claim based on equitable principles of restitution to prevent unjust enrichment.

However, it may be beneficial for a contractor to formulate its claim based on an implied term to account rather than as a claim for unjust enrichment.  In many construction contracts there are often caps on liability; for example, a cap on delay damages.  In cases where the Employer’s losses exceed the cap then a claim for unjust enrichment may fail where the Employer can show that its actual losses exceed the cap and therefore it has not been unjustly enriched by the calling on the bond.^[16]  In such a case the contractor will be better of framing its claim as an implied term to account having regard to the terms of the underlying contract.

Conclusion

Twenty years ago unjust enrichment was seen as the new Cinderella of the law.   Twenty years on unjust enrichment has developed her own place in the law but remains in the shadows of tort and contract.  More recently unjust enrichment has been used to fill gaps in the law where no remedy previously existed. It is an equitable right which prevents a person profiting unjustly from another’s loss.  Unjust enrichment is a cause of action which should not be overlooked especially where there are no express contractual rights or remedies or where there has been a total failure of consideration by one of the parties.

¹Unjust Enrichment, Davenport and Harris (1997) at page 1
²Benedetti v Sawaris [2013] UKSC 50 at para 10
³[2015] UKSC 66
⁴Arnold v National Westminster Bank [1989] 1 Ch 63 at 67.
⁵Lipkin Gorman v Karpnale Ltd [1991] 2 AC 58
⁶Niru Battery Manufacturing Co v. Milestone Trading Ltd [2003] EWCA Civ 1446.
⁷Claymore Services Ltd v Nautilus Properties Ltd [2007] EWHC 805
⁸Referenced in The Doctrine of Unjust Enrichment, Long R. & Avalon A., Long International Inc at p.2
⁹[2016] EWCA Civ 443
¹⁰[2015] EWHC 1443
¹¹[2015] UKSC 38
¹²[2014] EWHC 4250
¹³Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) [2004] EWCA Civ 487, paras 66-72
¹⁴Cargill International SA v Bangladesh Sugar and Food Industries Corp. [1998] 1 WLR 461 (CA)
¹⁵[2012] EWCA Civ 1629
¹⁶See The Law of Guarantees, Andrews & Millett, Sweet & Maxwell 6th edn (2011) at page 682