Spring Finance Ltd v HS Real Company LLC

An agreement marked subject to contract ordinarily creates no legally binding commitment. In pre-contractual negotiations, promissory estoppel, estoppel by representation and estoppel by convention have limited scope because the parties are not generally making clear and unequivocal commitments. A party seeking to establish an estoppel in that context must show a very strong case, including clear reliance and detriment making it inequitable to withdraw. Sophisticated commercial parties who know that formal contracts remain necessary will rarely satisfy that requirement without compelling evidence.

Spring Finance claimed £1.5 million plus interest under a guarantee given by HS Real Company LLC for the unpaid balance of a loan note issued on the sale of Cheval Property Finance Ltd. HS Real accepted that the guarantee had been triggered but alleged that the parties had agreed to defer enforcement for five years.

Alternatively, HS Real relied on promissory estoppel, estoppel by representation and estoppel by convention. The parties negotiated a memorandum of understanding which was signed by some parties but expressly marked subject to contract. The central issues were whether any binding oral agreement or later estoppel had arisen.

1. Disposition. Judgment was entered for Spring Finance. The alleged oral agreement, contractual variation and estoppel defences failed.
2. No oral agreement. On the evidence, there was no concluded oral agreement at the meeting on 5 November 2008 or subsequently. The documents, the parties’ conduct and the probabilities supported Spring’s evidence. The email referring to a verbal agreement had been sent to provoke a response and did not establish an agreement.
3. Subject to contract. The memorandum signed on 11 December 2008 was expressly marked subject to contract. In the circumstances, its meaning was obvious: it created no legally binding obligation. The parties were experienced commercial participants, understood the significance of the wording, and contemplated further formal documentation.
4. Contractual variation. The judge noted that, had an oral agreement been found, it would have been necessary to consider whether the guarantee’s requirement for variations to be in writing prevented an oral variation. The apparently differing guidance in World Online Telecom Limited v I-Way Limited [2002] EWCA Civ 413 and United Bank Limited v Asif (unreported, CA 11/2/00) made the issue arguable, but no concluded view was required.
5. Estoppel. The principles of promissory estoppel, estoppel by representation and estoppel by convention were not disputed. Their scope in pre-contractual negotiations was limited. The relevant question was whether there was a very strong case showing obvious and sustained reliance on the subject-to-contract arrangement. HS Real had not acted in reliance on any representation or shared assumption. It had largely waited for developments, while the restructuring work was pursued for Cheval’s survival. Nor would it have been inequitable for Spring to enforce the guarantee.