Interconnector, Interrupted: When "Subject To Contract" Negotiation May Become Binding

In GMC Utilities Group Ltd v Sumitomo Electric Industries Ltd [2026] EWHC 885 (TCC), Simon Lofthouse KC (sitting as a Deputy Judge of the High Court) addressed when "subject to contract" negotiations may become a binding agreement, and the interaction between the trigger to prevent release of sums in an escrow account (as agreed in a separate letter) and the dispute resolution forum within an underlying contract.

In this article we break down the High Court's decision and its implications for "subject to contract" negotiations, escrow arrangements and dispute resolution clauses.

Summary of the dispute

The dispute arose out of an undersea electricity interconnector project between Pembrokeshire, Wales and Wexford, Ireland.

The key facts included:

• SEI, the main contractor, sub-contracted onshore cable installation works to GMC under a sub-contract dated 8 August 2022.
• When GMC failed to achieve practical completion by the contractual date, SEI called on a performance bond, demanding approximately €3.9 million from the bond issuer.
• To avoid payment under the bond, the parties negotiated an arrangement (which was recorded in a letter between their solicitors dated 8 November 2024) whereby GMC would pay the bond sum into escrow instead.
• Crucially, paragraph 6 of the 8 November letter provided that if there was no agreement, adjudicator's decision, or commencement of court or arbitral proceedings on the underlying delay claims by 7 March 2025, the escrow sum would be paid to SEI.
• A formal escrow agreement was subsequently executed on 19 December 2024.

Was a binding agreement reached on 8 November 2024?

At the heart of the dispute was the question of whether the 8 November letter constituted a binding agreement.

GMC argued that it was not binding, but merely a step in negotiations conducted "subject to contract". GMC also contended that paragraph 1 of the 8 November letter – which comprised an undertaking by GMC's solicitors to pay the escrow sum into an agreed escrow account – was an unenforceable "agreement to agree" (relying on the time it subsequently took to agree the escrow account).

The Court rejected both arguments. Applying established principles – in particular from RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH [2010], the Court found that, whilst negotiations had begun "subject to contract," the parties had eventually reached a binding agreement in the 8 November letter. The letter itself bore no "subject to contract" heading, and no such reservation appeared in any correspondence thereafter.

Moreover, the urgency of the situation - with the bond issuer expected to pay imminently - supported the conclusion that the parties intended to be immediately bound. The Court also noted that SEI immediately wrote to the bond issuer in the very terms required by the 8 November letter, further evidencing a concluded agreement.

As for the "agreement to agree" argument, the Court held that paragraph 1 was an undertaking to pay into an agreed escrow account on terms already set out in the 8 November letter itself, and there was no reason to believe the escrow account would not be established - as indeed proved to be the case.

Did the escrow agreement supersede the 8 November agreement?

GMC relied on the entire agreement clause in the standard conditions of the escrow agreement to argue that the 8 November letter had been superseded. The Court disagreed. The escrow agreement expressly contemplated "Supplemental Agreements" between the transaction parties - a definition that encompassed the 8 November letter - and acknowledged that the escrow agent was not bound by such supplemental agreements. Rather than superseding the earlier agreement, the escrow agreement was found to provide a mechanism for giving effect to it.

Did GMC's Part 7 court proceedings satisfy paragraph 6?

As noted above, paragraph 6 of the 8 November letter provided that if there was no agreement, adjudicator's decision, or commencement of court or arbitral proceedings on the underlying delay claims by 7 March 2025, the escrow sum would be paid to SEI.

GMC issued Part 7 court proceedings on 5 March 2025, two days before the 7 March deadline.

SEI contended that, since the sub-contract required disputes to be resolved by arbitration, "commencement of court or arbitral proceedings" in paragraph 6 referred to arbitral proceedings specifically.

The Court rejected this too. The parties were at liberty to agree any criteria to prevent the escrow sum defaulting to SEI, and paragraph 6 expressly referred to "court or arbitral proceedings" without requiring one to the exclusion of the other.

The fact that the court proceedings might ultimately be stayed to arbitration was no answer: a stay does not render proceedings void ab initio, and the court proceedings were validly commenced. The Court also observed that the escrow agreement itself anticipated release of escrow monies on receipt of an order from "a duly appointed adjudicator, court or competent arbitral tribunal," further confirming that court proceedings were not excluded.

Stay to arbitration

Having found that GMC's Part 7 court proceedings did satisfy the escrow deadline, the court nonetheless granted SEI's application to stay those proceedings to arbitration under section 9 of the Arbitration Act 1996.

Applying the broad and purposive approach to the construction of arbitration clauses established in Fiona Trust v Privalov [2007], the Court concluded that all the relief sought by GMC - including declarations relating to the escrow funds - fell within the scope of disputes arising "in connection with" the sub-contract. The exclusive jurisdiction clause in the escrow agreement did not supersede the arbitration clause, since the escrow agreement was directed to the administration of the escrow sum, not the resolution of the underlying disputes.

Key takeaways

• Exercise caution with "subject to contract" labels: negotiations which begin as "subject to contract" can conclude in a binding agreement where the parties' words and conduct demonstrate an intention to be bound. The shift from negotiation to binding commitment can turn on seemingly small details: in this case, the absence of a "subject to contract" heading on later correspondence, the removal of reservation-of-rights language, and the immediate performance of obligations under the letter were all treated as indicators of a concluded agreement.
• Longstop provisions should be drafted with precision: if parties intend that only proceedings in the contractually agreed forum (e.g. arbitration) will prevent a default payment, the longstop clause should say so expressly. Loosely drafted provisions using disjunctive language such as "court or arbitral proceedings" will be construed according to their natural and ordinary meaning, potentially allowing compliance through the commencement of proceedings in any forum — even one that is subsequently stayed.
• Dispute resolution clauses across related agreements should be aligned: the judgment reinforces the Fiona Trust presumption that rational businesspersons are likely to have intended all disputes arising out of their relationship to be resolved by the same tribunal. An exclusive jurisdiction clause in an ancillary escrow agreement will not readily be construed as overriding the arbitration clause in the underlying contract, particularly where the escrow agreement is directed at the administration of funds rather than the substantive dispute. Where suites of related agreements are drafted, this is a reminder to ensure that dispute resolution provisions are consistent across the suite, or — where differences are intended — to make that intention unmistakeably clear.

Read the original article on GowlingWLG.com

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