This is a judgment of the court, written by Longmore LJ.

Mr Arnold Zulman and Mr David Zulman, the respondents to this appeal are father and son. The family has a long history in the confectionery business, having run a successful confectionery business in South Africa before moving to the United Kingdom.

Ashbury Confectionary Ltd (“Ashbury”) was incorporated by them on 4^th September 1997. It manufactured chocolates and other confectionery at its factory in Corby, Northamptonshire, and sold its products both abroad and to retailers within the United Kingdom. Ashbury’s customers within the United Kingdom included Woolworths, Tesco, Sainsbury, Asda and Duchy. Mr David Zulman was the managing director of Ashbury and Mr Arnold Zulman was a non-executive director and joint chairman. At all material times Mr Arnold Zulman was semi-retired and played no part in the day to day management of Ashbury. He is now in his mid 70’s.

In 2004 Ashbury required finance of approximately £2,000,000 and David Zulman and Mr Gee, Ashbury’s finance director, approached the appellant Bank to see if it would be willing to provide such finance. Following discussions with Leon Blitz and David Renwick, a series of credit applications (each slightly revised) were made to the Bank’s Credit Committee on 18^th March 2004, 30^th March 2004 and 19^th May 2004. Finance totalling £2,500,000 in all was sanctioned by the Credit Committee on 25^th May 2004 and Heads of Terms were sent to Ashbury and Mr Arnold Zulman on 27^th May 2004. The Heads of Terms expressly provided that they were “subject to contract” and would only be binding on the claimant when incorporated in a final facility letter. The provision of a facility to Ashbury was finally agreed in a facility letter dated 21st July 2004 (“the Facility Letter”).

The Facility Letter provided for the sum of £1,000,000 to be deposited with and charged to the bank. This sum was provided by Mr Arnold Zulman but there was a misunderstanding regarding the terms upon which it was provided. Mr Arnold Zulman had understood that the claimant just wanted to see “the colour of his money” to ensure that he was a serious man of substance. He had not been involved in the negotiations relating to the provision of the facility and did not know that a charge was to be granted over the deposit. Although the Facility Letter provided that the provision of the cash deposit and a charge over that deposit were conditions precedent to the drawing down of the facility, the deposit was not provided until 3 weeks after £2,000,000 of the facility was drawn down and the charge over the deposit was not in fact provided until many months later.

In or about March 2005 a dispute arose with Woolworths, which resulted in Woolworths withholding payment of £670,000 due to Ashbury. As a result of this it was necessary to seek to draw down the further £500,000. Mr David Zulman and Mr Gee entered into discussions with the Bank during which the Bank made it clear that it would require both Mr Arnold and Mr David Zulman to execute a personal guarantee before it would permit this further borrowing. Mr David Zulman said he was unwilling to give a personal guarantee but the Bank insisted that it would not allow any further funds to be drawn down until a personal guarantee from both Mr David and Mr Arnold Zulman was in place. In the event they agreed. The Bank required them both to obtain independent legal advice and the Guarantee was executed by them on 4^th May 2005. Clause 3 of the guarantee provided:-

Mr Arnold Zulman came to realise that there was little point in the Bank holding £1,000,000 on deposit against a loan of £2,500,000 and in 2006 he began to discuss with his son applying these monies in part-repayment of Ashbury’s borrowing. They both discussed this with the Bank at a meeting on 8^th December 2006 and it was agreed, subject to Credit Committee approval, that the cash deposit of £1,000,000 would be proportionately applied to reduce Ashbury’s borrowing and that the interest charged on that borrowing would be reduced. Credit Committee approval was given on 13^th December 2009, but negotiations continued during January 2007 and a further application was made to the Bank’s Credit Committee for approval of the extension of a repayment date. This further approval was provided by 30^th January 2007.

A draft variation letter was prepared on 21^st December 2006, which reflected the proposed reduction in Ashbury’s borrowing from £2,604,000 to £1,604,000. This was sent to Mr David Zulman on 21^st December 2006 and to Mr Gee on 28^th December 2006. In early January 2007 someone at the bank appears to have appreciated that an amendment to the Guarantee would be desirable if the level of Ashbury’s borrowing was to be reduced and on 12^th January 2007 a draft amended guarantee was prepared. On 24^th January 2007 Mr Querido, an officer of the Bank, sent a revised draft variation letter and the draft amended guarantee to Mr David Zulman by e-mail. The draft variation letter stated that clause 3.1 of “the side letter dated 4^th May 2005” was to be “null and void”; the draft amended guarantee had a new clause 3.1.

On 1^st February 2007 Mr Arnold Zulman authorised the bank (in writing) to apply the £1,000,000 cash deposit in part-repayment of Ashbury’s borrowing. On the same day Mr David Zulman informed Mr Querido of the Bank that there were no objections in principle to the Bank’s proposal (although some matter of detail had to be resolved) and in due course the Variation Letter was signed by Mr David Zulman and Mr Gee, on behalf of Ashbury (pursuant to a resolution of the Board of Directors) on or about 22^nd February 2007, to confirm Ashbury’s agreement to the variation of the Facility Letter of 21^st July 2004 and its accompanying “side letter dated 4^th May 2005”. The draft amended guarantee was however never signed by either of the Zulmans. It is that omission that has given rise to the Bank’s problems in this case.

On 4^th January 2008 Ashbury went into administration owing approximately £1,700,000 to the claimant. On 25^th March and 8^th April 2008 the Bank demanded payment of the sum of £500,000 plus interest from Mr David and Mr Arnold Zulman. Their defence has always been that since Ashbury’s debt was less than £2 million, their guarantees could not be called on.

The trial began on 11^th May 2009 and lasted 8 days. In his judgment of 15^th July the judge identified the six primary issues as being:-

Permission to appeal has now been granted to the Bank to appeal on a small part of issue (3); the ground was formulated in the proposed Grounds of Appeal in the following terms:-

The respondents’ first argument was that the question whether an oral agreement was reached on 1^st February was never a pleaded issue. Their second argument was that the judge had in any event made a finding in paras 52 and 53 of his judgment that no binding oral agreement had been made on 8^th December “or at some later stage” and that therefore ground 4.6 was wrong as a matter of fact since the judge had made relevant findings. Even if the judge was wrong in his conclusion the appeal should therefore be dismissed.

We reject these preliminary and over-technical arguments. It is fair to say that a specific oral agreement of 1^st February 2007 was not a pleaded issue in the sense that what the Bank chose to call the “Second Oral Agreement” was said to have been made on 8^th December 2006 or alternatively after that date “but before 1^st February 2007”. Nevertheless it was clear from Mr Downes’ cross-examination of Mr David Zulman and his closing submissions that the Bank’s main case in relation to issue 3 was that an oral agreement to provide a guarantee without the clause 3.1 limitation was concluded on the telephone on 1^st February 2007 and that the same defences were being run to an agreement made on that date as to any agreement made up to and including that date. Those defences were upheld by the judge in para 53 of his judgment and included the defence that the whole arrangement was “subject to contract” and therefore unenforceable until any relevant document was signed. Mr Adair for the respondents was therefore correct to say that the judge had made the relevant and necessary findings to resolve the issue. The submission, however, that that was the end of the matter and that this court could not decide whether the judge was correct unless an amendment of the Notice of Appeal was made cannot be accepted. Our function is to do justice between the parties.

Mr Paul Downes QC attacked the judge’s conclusion submitting that, although the earlier negotiations for the original Facility Letter and the first amendment and guarantee were indeed subject to contract, the judge was wrong to infer that prime facie negotiations for further amendment were on the same basis. Indeed, said Mr Downes, the right inference from the fact that earlier negotiations were expressly subject to contract and the later ones had no such express provision pointed strongly to an intention that any oral agreement reached should be binding. The parties may well have intended that any agreement reached should be recorded in writing but that did not mean that they did not intend to be bound unless and until the relevant documents were actually signed. The judge was also wrong to say that the bank’s witnesses accepted that the negotiations were subject to contract since both the relevant witnesses explained in re-examination that they thought subject to contract meant no more than that there would be a written record of the agreement.

In our judgment it is important not to over-emphasise the actual phrase “subject to contract”. It is a question, in every case where a written agreement is contemplated, whether the parties intend not to be bound until the relevant document is actually signed or merely intend that the relevant document is to be the record of an agreement made orally and intended to be binding when made. As the editors of Chitty, Contracts 30^th ed (2007) para 2-116 put it (albeit in relation to an express rather than (as here) implied stipulation for the execution of a formal document):-

The surest guides to the parties’ intentions are usually the terms of the draft documents passing between them. The use of the phrase “subject to contract” is, of course, lawyer’s short-hand intending to indicate an absence of intention to be bound until the relevant document is signed but its absence does not necessarily mean an intention to be bound once oral agreement is reached. In the present case it is necessary to consider the terms of both the draft variation letter and the amended guarantee.

The draft variation letter went through various permutations. It was headed “Facility letter dated 21^st July 2004 and side letter dated 4^th May 2005 made between” the Bank and Ashbury. Under the heading “Guarantee Amendment” it provided that there was to be a limit of £500,000 and (as we have already pointed out) that clause 3.1 of the side letter dated 4^th May 2005 was to be null and void. That at once gives rise to a difficulty since, although the further loan of £500,000 was dealt with by what was called a side letter of 4^th May 2005, that document had no clause 3.1. Nevertheless the obvious intention of the “guarantee amendment” was, once £1 million of the loan was paid off, to remove the requirement that there had to be an overall debt of over £2 million before the guarantee could be called on. The reference to the side letter must therefore be taken to be a reference to the original guarantee which did contain a (relevant) clause 3.1. So when Mr David Zulman, after (as we would infer) discussing the matter with his father, told Mr Querido on 1^st February that there was no objection in principle (albeit some details remained to be sorted out), there was on that date an acceptance by both Messrs Zulman that the requirement of an indebtedness of over £2 million before their guarantee was called on should no longer apply. The question, however, remains whether that was intended to be binding at once or only when the guarantee (or possibly the variation letter) was signed.

As at 1^st February 2007, the variation letter, which was, of course, addressed to Ashbury, had the following relevant provisions as well as that already mentioned:-

The relevant terms of the draft guarantee are even more important although they largely followed those of the first guarantee. These were as follows:-

For these reasons, it seems to us that the judge was correct to hold that Mr Arnold and Mr David Zulman were not to be bound unless they had actually signed the new guarantee document which they never did. Mr Adair had various other arguments e.g. that there was no note or memorandum to satisfy section 4 of the statute of Frauds Act 1677 but in the light of our conclusion in the main issue there is no need to consider them. We would dismiss this appeal.