Agreement expressed to be subject to board approval not binding until approval given

In a recent decision, the Commercial Court has considered whether an arbitration claim was settled in without prejudice correspondence between the parties' solicitors. It concluded that no binding settlement was reached, as the relevant offer was made subject to the conclusion of a formal settlement agreement and subject to board approval: Goodwood Investments Holdings Inc v ThyssenKrupp Industrial Solutions AG [2018] EWHC 1056 (Comm).

The judge (Males J) noted that it is well established that words such as "subject to contract" indicate that parties do not intend to be bound until a formal contract is executed, and said that the same applies to an agreement which is stated to be subject to the board approval of one or both parties. The latter wording indicates that the person concluding the agreement does not have authority, or at any rate is not prepared, to commit the company unless and until approval is given. Further, the judge commented, since the directors are required to exercise independent judgment as to whether the transaction is in the best interests of the company, it is very hard to see how there could in such circumstances be an express or implied promise that approval would be forthcoming or was a mere formality.

The obvious implication is that parties who receive offers made subject to board approval cannot rely on a binding agreement having been reached unless and until approval is given.

It is possible for "subject to contract" type conditions to be dispensed with by necessary implication, but there was no indication of that in the present case. The judge rejected an argument that the parties' agreement to adjourn the arbitration confirmed that a binding settlement had been reached. The parties had recognised that the arbitration might need to resume, and had asked the arbitrators to maintain their availability for the remainder of the period set aside for the hearing. That was inconsistent with a binding agreement having been reached.

The judge also rejected an argument that the offeror was under an "interim obligation" to seek board approval and not do anything to prevent approval being granted. It may have been reasonable to expect that approval would be given, but that was a risk that the offeree took.

The decision is also of interest as a relatively rare example of an application to the court under section 45 of the Arbitration Act 1996 for a ruling on a preliminary point of law. The arbitrators had given permission for the application to be made, due to the difficulties that would arise if the arbitrators were to consider the without prejudice correspondence only to find that no settlement had been reached. For more information on that aspect, see this post on our Arbitration Notes blog.