Statements during negotiations as collateral contracts

Lightman J in Inntrepreneur Pub Company Ltd v East Crown Ltd ([2007] EWCA Civ 622, CA (Eng)) identified five features of a collateral warranty. Applying them, it is unlikely that a statement made during the course of negotiations was intended to have contractual effect where: it was followed by subsequent negotiations and not repeated in the formal contract; there was an appreciable lapse of time between the statement and the contract; and the representation was one of future fact.

In Business Environment Bow Lane Ltd v Deanwater Estates Ltd ([2007] EWCA Civ. 622, CA (Eng)) L and T negotiated for the surrender of the residue of the lease of commercial premises and the grant of a new lease of the same property. The negotiations were subject to contract and came to fruition. In the course of negotiations, T sought to establish that there would be no liability for dilapidations at the end of the term. In a key communication, the solicitors acting for L seemed to agree this principle. Nevertheless, T signed a full repairing lease. At the end of the term, L claimed a very substantial sum from T in respect of alleged breaches of the repairing covenant. T argued that L was bound by its solicitors statement to the effect that there would be no such claim. It argued this primarily on the basis that that statement was contractually binding as a collateral contract. They failed in this.

Lightman J in Inntrepreneur Pub Company Ltd v East Crown Ltd ([2007] EWCA Civ 622, CA (Eng)) identified five features of a collateral warranty. Applying them, it is unlikely that a statement made during the course of negotiations was intended to have contractual effect where: it was followed by subsequent negotiations and not repeated in the formal contract; there was an appreciable lapse of time between the statement and the contract; and the representation was one of future fact. Here the relevant communication was followed by further negotiations and there was a reasonably lengthy gap between the time of the statement and of the contract. Crucially, the statement was one of future fact which a reasonable commercial person would be unwilling to make.

The Chancellor said:

‘In a normal conveyancing transaction in a commercial context with both parties represented by experienced solicitors the usual course of dealing is to ensure that all agreed terms are put into the contract and conveyance, transfer or lease. Accordingly, those who assert a collateral contract in relation to a term not so contained must show that it was intended to have contractual effect separate from the normal conveyancing documents. Otherwise it will be invalidated by s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 even if evidence as to its existence is admitted.’ (para. 43)

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