Binding contracts – to bind or not to bind? That is the question

The case

In the High Court case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2022] EWHC 1467 (Ch), it was concluded that a signed document titled “Heads of Terms of Proposed Agreement” did not create a legally binding agreement.

It was Pretoria’s position that the parties had entered into an agreement (in a document titled “Heads of Terms of Proposed Agreement…”) in November 2013 under which Blankney Estates had agreed to grant Pretoria Energy a 25 year lease of an anaerobic digestion plant. The agreement contained a “lockout provision” meaning that Blankney would not enter into any negotiations with third parties up to 31 July 2014.

By September 2014 the lease had not been entered into and Blankney had by then decided that, as the exclusivity period had expired on 31 July 2014, they now believed that Blankney’s interests were best met by ensuring the opportunity to acquire the lease to the site became a competitive process and therefore could no longer offer Pretoria the exclusivity that had previously been in place. It was Blankney position that the only enforceable obligation under the heads of terms related to the lockout period during which Pretoria had exclusivity and that there was no obligation to enter into a lease.

Considerations for binding agreements

Therefore the question for the judge was what were the, if any, binding obligations of the parties under the agreement.

In addition to considering the legal principles relevant to determining whether the document was legally binding (contractual intention and certainty), the court looked at the whole course of dealing between the parties.

The judge concluded that the heads of terms document did not create a legally binding lease agreement nor any obligation to enter into a lease. She discussed four significant reasons which led to the conclusion:

• 1. The time limited lockout provision, which both parties agreed to be binding, was incompatible with the Heads of Terms as a whole being a binding contract. In other words, as the defendant was free to negotiate with other parties at the expiration of this look-out provision, the rest of the Heads of Terms could not be binding.
• 2. Previous drafts of the Heads of Terms were reviewed by the judge, which revealed language that if it had remained, showed no intention to bind the parties.
• 3. The Heads of Terms stated the lease would be contracted out of the Landlord and Tenant Act 1954, demonstrating no intention for the document to be binding as the procedure had not been followed for this contracting out process.
• 4. All terms for the lease had not yet been agreed.

Finally, the ruling confirmed that parties’ communication and conduct after the date of an alleged agreement is relevant to the question of whether a contract was formed or not (although this would not be the case for contractual interpretation).

Summary

This ruling brings important considerations for those drafting these initial agreements into sharp focus. In particular, drafters should remember that the absence of the words ‘subject to contract’ is not essential and the label ‘Head of Terms’ is not itself conclusive. A court will look at the parties’ conduct in order to determine whether the principles of contractual formation – offer, acceptance, consideration, intention to create legal relations and certainty – are present.

Ultimately, these lessons learnt by the claimant can prove as useful guidance for practitioners on how to avoid unintentionally creating a legally binding agreement when drafting pre-contractual documents and the inverse.