Destiny 1 Ltd v Lloyds TSB Bank Plc

Whether negotiations have produced a binding contract must be assessed objectively by considering the communications and dealings as a whole. Where commercial parties negotiate an integrated package of financial arrangements, a communication addressing one component will not ordinarily create a separate contract unless the parties objectively intended that component to bind independently. Security documents executed during negotiations may be steps towards completion and may be held in escrow pending agreement on the remaining elements. Consideration only becomes relevant after the court is satisfied that the parties reached an agreement intended to be legally binding.

Destiny 1 Ltd appealed against the dismissal of its claim for damages against Lloyds TSB Bank Plc. Destiny alleged that correspondence in September 2008 created a binding obligation on the Bank to issue a guarantee in favour of Nisa-Today’s (Holdings) Ltd, although wider negotiations concerning an overdraft, refinancing of existing HSBC borrowing and security arrangements had failed.

His Honour Judge Richard Seymour Q.C. held that the parties were negotiating an integrated package which stood or fell together, and that no separate contract for the guarantee had been made. He also held that the alleged breach had not caused the claimed loss. The central issue on appeal was whether the parties intended the guarantee arrangements to bind independently of the proposed refinancing.

1. Appeal dismissed. The Court of Appeal unanimously agreed with the trial judge that no binding contract requiring the Bank to issue the guarantee had been made.
2. Per Lord Justice Moore-Bick, negotiations conducted through successive oral and written communications must be assessed as a whole. Contract formation is determined objectively, by asking how a reasonable person in the position of the recipient would have understood the communications. The essential question was whether the parties contemplated that the Bank could become bound to provide the guarantee regardless of whether it agreed to refinance the HSBC debt.
3. The negotiations concerned an integrated package of arrangements for both Mr Khalid and Destiny. The proposed facilities were supported by interconnected security, including charges over properties, a personal guarantee and a debenture. There had been no separate negotiation or agreement with Destiny concerning the guarantee alone. In that context, the Fox letter and its acceptance did not create an independent obligation.
4. The execution of the debenture and personal guarantee did not alter that conclusion. Viewed in the context of the negotiations, they were steps towards completion and were to be treated as executed in escrow pending agreement on the refinancing.
5. The trial judge’s consideration analysis was not necessary. The question of consideration arises only once the court is satisfied that the parties reached terms intended to be legally binding. In any event, the evidence did not establish the relevant agreement. It was therefore unnecessary to determine the claim for damages.

1. Court of Appeal (Civil Division): In [2011] EWCA Civ 831, the appeal was dismissed unanimously.
2. High Court of Justice, Queen’s Bench Division: His Honour Judge Richard Seymour Q.C. dismissed the claim, holding that no binding agreement for the guarantee had been reached and, alternatively, that the Bank had not caused the claimed loss.