Investec Bank (UK) Ltd v Zulman & Anor

Where parties contemplate a written agreement, the court must determine objectively whether they intend to be bound only when the document is signed or intend the document merely to record an existing oral agreement. The absence of the phrase “subject to contract” does not necessarily establish an intention to be bound orally.

The terms of draft documents are usually the surest guide. Provisions requiring signature and prior independent legal advice may demonstrate that execution is a condition of legal obligation. An agreement in principle will then remain unenforceable until the contemplated document is signed.

A bank financed a confectionery company under arrangements supported by personal guarantees from its directors. The guarantees became enforceable only if the company’s debt exceeded £2 million. When a £1 million deposit was applied in reduction of the company’s borrowing, the bank proposed an amended guarantee removing that threshold.

The guarantors indicated that they had no objection in principle, but they never signed the draft amended guarantee. After the company entered administration owing about £1.7 million, the bank demanded payment under the guarantees.

David Steel J rejected the bank’s case that an enforceable oral variation had been concluded. The bank appealed on the limited issue whether the parties had made a binding oral agreement on 1 February 2007 to disapply the threshold. The central question was whether they intended to be bound immediately or only upon execution of the contemplated documents.

1. The appeal was dismissed. The parties reached an agreement in principle on 1 February 2007 that the requirement for indebtedness exceeding £2 million should cease to apply. They did not, however, intend that agreement to become binding before the new guarantee was signed.

2. Where parties contemplate a written agreement, the decisive question is whether they intend to withhold legal obligation until execution or merely intend the document to record an already complete oral agreement. The court should not place excessive weight on the presence or absence of the phrase “subject to contract”. Its absence does not necessarily show an intention to be bound upon reaching oral agreement.

3. The terms of the draft documents passing between the parties were the surest guides to their objective intentions. The draft variation letter required acceptance by signature and return within 14 days. It therefore bound the company only when the company signed it. Its execution did not bind the guarantors personally.

4. The draft guarantee likewise contemplated signature before obligation arose. Most significantly, it directed the guarantors to obtain independent legal advice before entering into the guarantee and included a solicitor’s certificate. That requirement would have served no purpose if an earlier oral agreement already bound the guarantors. They had to remain free to act upon advice against signing.

5. The guarantors never executed the amended guarantee and were therefore not bound by it. The court did not decide the bank’s alternative argument under section 4 of the Statute of Frauds Act 1677, because its conclusion on intention disposed of the appeal.

6. In the supplementary costs judgment, the court ordered the bank to pay the respondents’ costs in full, with £18,000 on account. Although the bank succeeded on the pleading issue, that issue was closely connected with the unsuccessful substantive appeal and justified no separate costs order.

1. Court of Appeal (Civil Division): In [2010] EWCA Civ 536, dismissed the bank’s appeal. The guarantors were not bound because the contemplated amended guarantee was never signed.

2. High Court, Queen’s Bench Division, Commercial Court: David Steel J rejected the bank’s claims concerning construction, rectification, oral variation and estoppel. No citation for that decision is stated in the judgment.