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Heads of terms can form a binding contract

The High Court has held that heads of terms agreed at a mediation are capable of amounting to a binding contract that the court will uphold.

The case of Abberley v Abberley concerned a farm in Wales being divided between family members. A dispute arose which the family attempted to resolve at a mediation in 2011. The mediation started at 10 am and continued until after 10 pm.

The mediation agreement stated that ‘Any settlement reached in the mediation will not be legally binding until it has been reduced to writing and signed by, or on behalf of, each of the parties’.

The parties were able to reach a resolution and the mediator typed up an agreement. However before it could be printed, the draft disappeared from the screen and could not be retrieved. Instead the mediator wrote out the heads of terms and read them aloud in front of all the attendees. Both he and the solicitors representing the parties then signed the terms. The terms referred to various parcels of coloured land but no coloured pens were available to demarcate these at the time. Instead a pencil was used to draw on a plan previously drawn up by valuers.

Following the mediation, the parties exchanged correspondence concerning the precise detail of the agreement. An attendance note of the mediation discussed the need for transfers, a tenancy and cross indemnities, which did not feature in the heads of terms. There was discussion of the desire for a formal deed but none was ever completed.

The claimants issued proceedings for a declaration that the heads of terms constituted a binding contract between the parties. The defendants argued that the terms merely set out some matters agreed in principle or, if they did form a binding contract, that the contract was not sufficiently comprehensive to comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (‘section 2’).

Creating a valid contract

The courts have held over the years that for a valid contract to be created, there needs to be an offer by one party that is accepted by another party, consideration for the contract (effectively meaning that all parties are giving something in exchange for something else, in contrast to a mere gratuitous promise), an intention to create legal relations and sufficient certainty of terms.

For contracts for the sale or disposal of an interest in land, there are additional hurdles to be overcome. A contract also has to satisfy the additional requirements contained in section 2, which means that the contract has to be in writing, contain all the terms that the parties have expressly agreed and be signed by or on behalf of each party.

Decision

The High Court held that in this case the heads of terms had created a binding contract. Even if the parties had envisaged completing a formal deed after the mediation, this did not preclude the heads of terms forming a binding contract at an earlier stage.

As to intention to create legal relations, the whole point of the mediation was to resolve the long running family dispute. Given that a written agreement was signed on behalf of the parties, as was required by the mediation agreement, if the terms were sufficiently certain it was difficult to see how it could be said that the parties did not have the requisite intention. In the court’s view, they did have that intention.

Were the terms sufficiently certain? The test is what a reasonable person, having all the background knowledge that would have been available to the parties, would have understood them to be. The court found that the parties had understood which land was to be transferred, despite there being no coloured plan. The fact that no-one voiced any uncertainty either at the time or during the following months supported this conclusion.

The essentials were set out in the signed document with sufficient certainty. The fact that attempts were later made to agree further details did not detract from that certainty. As the terms were certain, the requirements of section 2 were satisfied.

The claimants were therefore entitled to a declaration that the heads of terms formed a binding agreement, and to enforcement of that agreement.

Comment

This case is a cautionary tale. It is not uncommon for mediations to continue long into the night and for agreements to be drafted rapidly to enable the mediation to be completed in one day, which can lead to parties having second thoughts later.

However this case demonstrates that parties who sign an agreement at the end of a mediation process will struggle to claim later not to be bound by it.

Further information

Abberley v Abberley [2019] EWHC 1564 (Ch).

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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