Contract formation during contract negotiations

Fenchurch Advisory Partners LLP v AA Ltd (formerly AA PLC) [2023] EWHC 108 (Comm)

The question

Can a contract negotiation, which has broken down before all of the contract terms have been agreed, nevertheless result in a binding agreement?

The key takeaway

Whether there is a binding contract between the parties and, if so, on what terms, depends on what was agreed in the parties’ communications (words or conduct), the wider context and whether that leads to an objective conclusion that the parties intended to create legal relations, have agreed all the essential terms required for a legally enforceable contract and there is valid consideration.

The background

A claim for fees was bought by an investment banking and corporate finance advisory firm, Fenchurch Advisory Partners (Fenchurch), in respect of the advice and assistance it provided in the potential sale of the insurance division of the AA. The terms of engagement of Fenchurch were extensively negotiated between the parties but no engagement letter was ever signed and the sale of the insurance division did not go ahead.

For about 11 months, while the engagement letter negotiations were taking place, the Fenchurch team worked on the potential sale project: attending working group and steering committee meetings, co-ordinating the work of other advisers, scoping the various workstreams, assisting in the preparation of a financial model and drafting key documentation.

Fenchurch pleaded that the fact that work had been done by them was highly relevant to their position that the parties had intended to enter into a binding contract. It was argued that the combination of the exchanges (many by email) and the carrying out of the work agreed in those exchanges gave rise to a binding contract.

The AA, on the other hand, submitted that a binding contract should only come into being when contractual documents were signed by the parties (and this was particularly the case where solicitors were involved on both sides). The AA argued that the way the engagement letter was negotiated envisaged the requirement of signatures and drew the court’s attention to the fact that there was an entire agreement clause. This reinforced their case that the parties wanted a written agreement which set out all of the terms of their bargain.

The decision

Two main issues for the court to decide were whether a binding contract had been agreed between the parties and, if not, whether there was an implied contract.

In considering whether a binding contract had been formed, the court firstly accepted the AA’s case that not all of the terms of the contract had been agreed by the time the project was dropped.

The court then considered whether there had been a binding agreement “with some details left over”. While it is possible for parties to reach a binding agreement when there are still unfinished negotiations, this was not true in the present case. Email exchanges between the parties dealt specifically with the fee arrangement (ie the commercial negotiation) and not the outstanding points relating to the detailed terms of the engagement letter (the legal negotiation). Although these workstreams had been separated out, the expectation was that both workstreams would be completed and then the final engagement letter signed.

It was also clear that at all stages, the parties envisaged that the terms of their agreement would be contained within a signed engagement letter – there was never any suggestion that a binding agreement would come into being at any earlier stage. There was also no other external sign that the parties were taking a different course to a legally binding agreement.

The court therefore concluded that there was no binding agreement between the parties.

Fenchurch argued in the alternative that there existed an implied contract that it would be paid a reasonable fee for its services. In fact, it was “commercially absurd” to suggest that it was acting on the basis that it did not expect to be paid should the AA unilaterally refuse to progress the negotiation of the contract.

The High Court also rejected this argument. As evidenced by the extensive negotiations, it was never contemplated by the parties that the AA would pay a “reasonable fee”; they expected to agree a specified fee. Additionally, Fenchurch began work on the understanding that its engagement terms would be agreed in due course, not that there was already an agreement in place.

Fenchurch’s other alternative argument for a claim in restitution for unjust enrichment in respect of the services that it had provided to the AA, was successful. However, crucially, this did not include any success fee element and was limited to a “progress payment” in relation to the services provided.

Why is this important?

It is not uncommon for a party to start performing some of its obligations before a written agreement is signed. The case illustrates the importance of ensuring clarity during negotiations. If parties mean to create a legally binding agreement before all terms are agreed this should be dealt with explicitly. Whereas, if parties are negotiating one specific aspect, it should be made clear that agreement on that aspect is not a binding contract on its own and that agreed terms are subject to the final contract being agreed and signed.

Any practical tips?

When negotiating and agreeing individual aspects of an overall deal, particularly important ones such as fees, specify whether agreement is subject to the signing of the entire contract embodying all terms or whether the parties intend to be bound on that specific aspect.

The key question is what the parties objectively intended, having regard to their communications and the wider context. Use of the phrase “subject to contract” usually indicates that there is no intention to be bound until there is a signed agreement, but it is not determinative, and so the communications and the basis on which any work is being carried out should be made clear.

A party to contract negotiations who is undertaking progress work should ensure this is provided for expressly and separated out from the overall transaction. Create a clear formula which can be applied to all potential outcomes to calculate the market value of the services.

Although a claim in restitution for unjust enrichment in respect of goods or services provided may provide some level of compensation, it is a much more uncertain outcome and may not cover all of the consideration that a supplier may wish to contract for.

Spring 2023