GMC Utilities Group v Sumitomo Electric: when does a "subject to contract" label lose its force?

In a judgement handed down on 16 April 2026, Simon Lofthouse KC, sitting as a Deputy Judge of the High Court in the Technology and Construction Court, has clarified the circumstances in which commercial negotiations conducted "subject to contract" can crystallise into enforceable obligations — with significant consequences for how parties manage escrow arrangements and performance bond disputes in construction sub-contracts.

Sumitomo Electric Industries Ltd (SEI) was main contractor on an undersea electricity interconnector between Pembrokeshire and Wexford. GMC Utilities Group Ltd (GMC) held a sub-contract for the onshore civil works. Completion ran late, and on 28 October 2024 SEI made a demand on a performance bond for €3,936,366. To forestall payment by the bond issuer, the parties engaged in rapid negotiations aimed at diverting the sum into escrow pending resolution of competing claims over extensions of time and delay damages.

Those negotiations produced a letter from Michelmores LLP (then acting for GMC) dated 8 November 2024, which confirmed an agreement in eight numbered paragraphs — including an undertaking to pay the escrow sum, obligations on SEI to stand down the bond demand, and a mechanism under which the escrow sum would be paid to SEI automatically if GMC failed, by 7 March 2025, to reach agreement, obtain an adjudicator's decision, or commence court or arbitral proceedings on the underlying claims. A formal Escrow Agreement with Law Debenture was executed the following month, on 19 December 2024.

GMC contended that the November letter was merely an intermediate step in negotiations that had begun "subject to contract", and that no binding agreement existed until the formal Escrow Agreement was concluded six weeks later. Lofthouse KC rejected that analysis.

The opening paragraph of the 8 November letter referred expressly to SEI's acceptance of GMC's earlier counter-offer — language consistent with a concluded agreement rather than continued negotiation. No "subject to contract" heading appeared on the letter itself, nor on any of the exchanges that followed SEI's acceptance that morning. The reservation of rights included in GMC's 7 November counter-offer was also absent. These features, taken together, pointed clearly to the parties having moved beyond conditional negotiation.

The court also dismissed the argument that paragraph 1 of the letter — the undertaking to pay into "an agreed escrow account" — was unenforceable as an agreement to agree. The escrow account terms were set out in the letter itself; there was no genuine uncertainty about the essential obligations. The subsequent Escrow Agreement was machinery for implementing those obligations, not a precondition to them.

GMC relied on the entire agreement clause in the Escrow Agreement's standard conditions, arguing that it extinguished the obligations in the November letter. The court found this reading unsustainable. The Escrow Agreement expressly anticipated "Supplemental Agreements" — defined to include agreements between the transaction parties relating to the underlying reason for entering the escrow arrangement — and contained a provision ensuring the escrow agent was not bound by any such agreement. That structure was wholly consistent with the November letter remaining operative as between GMC and SEI, with the Escrow Agreement providing the administrative mechanism for its performance. Where the two instruments appeared to conflict, the Escrow Agreement took precedence as a matter of construction; and on that basis, the recital confirming the appointment was made "further to the Supplemental Agreements" reinforced rather than displaced the November letter's continuing effect.

GMC issued Part 7 proceedings on 5 March 2025 — two days before the deadline. SEI argued that, given the sub-contract's arbitration clause, only arbitration proceedings would satisfy paragraph 6. The court disagreed. The parties had been free to specify any criteria they wished; they chose to include court proceedings alongside adjudication and arbitration. The fact that those court proceedings might subsequently be stayed to arbitration did not render them void or non-compliant. GMC had therefore met the condition, and the escrow sum was not automatically payable to SEI.

The Part 7 proceedings were nonetheless stayed under section 9 of the Arbitration Act 1996. The substantive claims — extensions of time and delay damages under the sub-contract — fell within the broad arbitration clause at clause 20.12, and neither the exclusive jurisdiction clause in the Escrow Agreement nor the references to court proceedings in clause 4.1.2 were sufficient to displace it. Lofthouse KC applied the principle from Fiona Trust v Privalov that, as rational businessmen, parties are presumed to have intended disputes arising from their relationship to be decided by a single tribunal.