Adjudication Matters – February 2021

2nd February 2021

Unsettled Business: is your settlement offer “subject to contract”?

In Aqua Leisure International Limited v Benchmark Leisure Limited the TCC determined that a settlement agreement which is expressed to be ‘subject to contract’ will only be binding when executed by the parties.

Background

Aqua Leisure International Limited (Aqua) was appointed by Benchmark Leisure Limited (Benchmark) in relation to the development of Alpamare waterpark in Scarborough, under a JCT Design and Build Contract in July 2015.  After practical completion had been achieved, Aqua referred a dispute in respect of interim payment to adjudication, and obtained an adjudication award in its favour (the Adjudication Award). The Adjudication Award included payment of Aqua’s legal costs under the Late Payment of Commercial Debts (Interest) Act 1998.

Following receipt of the Adjudicator’s decision, the parties entered into settlement negotiations. On 31 August 2017 Aqua proposed that Benchmark make payment of £217,998 plus VAT, to be paid in instalments in accordance with a schedule of payments and that as part of this settlement a Guarantor was to guarantee the sum of £110,000. Aqua’s settlement offer was expressed to be ‘without prejudice and subject to contract‘.

The following day, Benchmark responded to Aqua with an email which simply read “agreed“. Aqua replied confirming that its lawyers would draft the settlement agreement and the guarantee wording. On 13 December 2017 Aqua sent a “deed of settlement and payment guarantee” to Benchmark for “review and completion“. The parties to the deed were Aqua, Benchmark and the Guarantor.

Benchmark made payment to Aqua in accordance with the schedule in Aqua’s settlement offer, but Benchmark failed to return a signed written copy of the settlement deed. Similarly, the Guarantor failed to return a signed copy of either the settlement deed, or the guarantee. Aqua requested that Benchmark provide the signed agreement on 6 different occasions, without success. On 11 May 2018 Benchmark wrote to Aqua explaining that the Guarantor would not be providing a guarantee as anticipated under the settlement offer.

Aqua then sought to enforce the Adjudication Award against Benchmark.

The Dispute

Aqua drew attention to the fact that the settlement offer put to Benchmark on 31 August 2017 was specifically expressed to be “subject to contract“. Although Benchmark communicated its acceptance of the settlement offer to Aqua on 1 September 2017, Aqua argued that this acceptance did not itself turn the settlement offer into a binding agreement. On this basis, Aqua argued that it retained the right to enforce the Adjudication Award.

Benchmark argued that Aqua had effectively waived the “subject to contract” requirement in relation to the settlement offer because Benchmark had substantially complied with its payment obligations and had carried out further works as set out within the settlement deed.

The Court’s Decision

The Court ruled in favour of Aqua, and enforced the Adjudication Award. The Court considered that:

• the words “subject to contract” have a defined legal meaning and cannot easily be disregarded. In general, parties are free to enter into their own legal agreements, and the courts will usually uphold terms agreed upon by the parties, including terms which relate to contractual formalities
• while Benchmark had partly performed its obligations as set out under the draft settlement deed, this alone did not demonstrate that the requirement to enter into a formal settlement deed had been waived
• on the basis of the above, no settlement agreement had formally been entered into by the parties, and Aqua was entitled to enforce the Adjudication Award.

The Court also confirmed that an Adjudicator has no power to award legal costs under the Late Payment of Commercial Debts (Interest) Act 1998. The parties had not consented to give the Adjudicator jurisdiction to award legal costs, and so this part of the Adjudication Award was severed and was unenforceable. The rest of the Adjudication Award was, however, enforced.

Practical Consequences

This case is a reminder of the significance of the expression “subject to contract” in settlement negotiations. As illustrated above, the courts will generally take a strict view of the requirement to properly record and execute settlement agreements where a settlement offer is expressed to be “subject to contract“. In such circumstances, the fact that a party has attempted to comply with its obligations under a proposed settlement agreement will not itself be enough to evidence that the settlement agreement is binding.

When making a settlement proposal, proper use of the expression “subject to contract” will assist in avoiding the risk of being inadvertently bound by an offer. In respect of complex settlement negotiations which include multiple parties, or a series of specified payment obligations, it is especially important to ensure that the settlement terms are clearly recorded in a formal document in order to avoid any ambiguity over the precise nature of the parties’ post-settlement obligations.

Settlement agreements should also confirm the extent to which the parties have agreed to waive future claims in respect of a particular project. Attempting to settle disputes without executing formal documentation may result in uncertainty as to a party’s right to bring a future claim, or its potential ongoing liability.

Finally, parties should note the Court’s confirmation that adjudicators do not have jurisdiction to award legal costs as part of any adjudication award, unless the parties have both expressly agreed to this. Where an adjudicator against one or more of the parties’ wishes, indicates his/her intention to award legal costs during an adjudication, that party should immediately raise a  jurisdictional challenge with reference to this TCC ruling.