Aqua Leisure International v Benchmark Leisure[1] involved a payment dispute between parties involved in the construction of a water park. The judgement clearly set out that an agreement made “subject to contract” is non-binding, until and unless the formal documents are signed. The judgement also took account of common practice and understanding in deciding that a party had not waived its right to challenge the jurisdiction of an adjudicator. Also notable is the conclusion that some fundamental points of jurisdiction cannot be waived.

Background

Benchmark was the developer of a water park, and had employed Aqua to carry out building works. A dispute arose over payment and Aqua referred the matter to adjudication. The adjudicator found in favour of Aqua, and awarded a sum of money, which included legal costs under the Late Payment of Commercial Debts (Interest) Act 1998.

Shortly afterwards, the parties met to discuss settlement and reached a compromise. Under the terms of the compromise agreement, Benchmark would make several payments to Aqua, Benchmark’s parent company would provide a guarantee, and Aqua would carry out snagging works. Importantly, one clause stipulated that this compromise agreement was “without prejudice and subject to contract”.

Benchmark duly began making payments and Aqua began snagging works. Aqua sent Benchmark the formal documents for signature but received no reply. It then became clear that Benchmark was at risk of defaulting on the final payment. Aqua made it clear that it wished to rely on the parent company guarantee, to which Benchmark replied that there would be no guarantee. In response. Aqua brought the current proceedings to enforce the adjudicator’s decision.

Decision

The court firstly had to decide whether the compromise agreement was binding. If so, then the compromise agreement would supersede the adjudicator’s decision. Benchmark submitted that the compromise agreement was binding and argued that the parties had agreed to treat it as such, as illustrated by their performance of some of the terms of the agreement. It submitted that the “subject to contract” proviso had been waived. Aqua refuted this, pointing to the clause that stipulated that the compromise agreement was clearly made “subject to contract” and therefore did not become binding until it was reduced to writing. It argued that as Benchmark had refused to sign the formal documents that it was sent, the compromise agreement never became binding.

The court agreed with Aqua. Applying case law[2], the court interpreted the “subject to contract” clause to mean that neither party intended to be bound in law until and unless a formal contract was made. In agreeing this clause, each party had reserved the right to withdraw until such time as a binding contract was made. It was held that the compromise agreement did not bind either party, and therefore did not bar the right to enforcement of the adjudicator’s decision. It also held that the fact that works had been carried out, and payments “banked”, was not evidence of a “new” formal contract, as these could also have related to the underlying original contract.

The second question before the court concerned the part of the award that covered legal costs.

Shortly after the adjudicator issued the decision, the judgement in Enviroflow v Redhill[3] was delivered. Enviroflow makes clear that an adjudicator is unable to award the costs of the adjudication process unless the parties have expressly agreed to this in writing. In the present case, Aqua and Benchmark had not done so. In light of this, Benchmark submitted that the adjudicator was wrong in law to have awarded costs and invited the court to declare that costs were not payable. Aqua submitted that this was a matter of the jurisdiction of the adjudicator. The issue of costs was referred to the adjudicator, engaged with by Aqua, and dealt with by the adjudication. At no point during the adjudication had Benchmark reserved its position on the costs issue. Therefore, Benchmark had waived its right to challenge the jurisdiction of the adjudicator on this basis.

The court agreed that this issue was jurisdictional and that Benchmark had not reserved its position on costs. However, the court took into account that this all took place before the decision in Enviroflow had been published. The common practice and understanding prior to that decision was that the award of legal costs in the absence of written agreement did not necessarily give rise to a jurisdictional issue. Benchmark had proceeded on this basis and so had not reserved its position on costs. It would be wrong to decide that Benchmark had therefore waived its right to challenge the jurisdiction of the adjudicator. The consequence of that decision would be to encourage parties to make general reservations covering all developing aspects of law, on the off-chance that some later case or statute could be used to their benefit. That would be undesirable.

The court went on to consider that a fundamental point of jurisdiction, such as that raised here, cannot be waived. The decision in Enviroflow was founded on the basis of statute; it was the interpretation of a statutory provision[4] which decided that case. Therefore, as the court highlighted, “the adjudicator’s lack of jurisdiction did not arise out of a mere procedural failure (which could be waived) but rather out of an express statutory provision”. The effect of that statute could not simply be overridden by agreement or conduct that would otherwise amount to waiver.

The court concluded that the adjudicator’s decision was to be enforced, with the exception of that part which awarded legal costs to Aqua.

Implications

Parties may be accustomed to seeing correspondence and draft agreements marked “without prejudice and subject to contract”; this case reminds us of the purpose and importance of doing so. When negotiating on a “subject to contract” basis, parties take the commercial risk that one or both of them might back out of the agreement. This may still be the case even when performance (either works or payment) has been carried out. Parties should take steps to manage this risk until and unless the formal contract has been signed.

For tailored advice on this or another related matter, please contact Iain Drummond or Leigh Herd, of our property and infratructure disputes team, or your usual Shepherd and Wedderburn contact.

[1] [2020] EWHC 3511 (TCC)

[2] Generator Developments Ltd v Lidl UK GmbH [2018] EWCA Civ 396

[3] Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd [2017] EWHC 2159 (TCC)

[4] Housing Grants, Construction and Regeneration Act 1996 s108A

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