"Subject to contract" and the legal effect of the label on negotiations

"Subject to contract" and the legal effect of the label on negotiations

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In the recent case of Joanne Properties Limited v Moneything Capital Limited, the Court of Appeal was asked to consider the use and legal effect of the label “subject to contract” during settlement negotiations.

The decision, available here, reinforces the importance of exercising care when using labels such as “subject to contract” in negotiations and highlights that, where the term is used, parties will not be legally bound until an agreement is signed.

Background

Joanne Properties Limited (Joanne) owned a property in Wandsworth and borrowed money from Moneything Capital Limited (Moneything) which was secured by a charge over the property. Joanne fell into arrears under the charge and Moneything appointed receivers to recover the loan.

Joanne argued that both the loan agreement and the charge had been procured by undue influence and sought an injunction to prevent the receivers taking steps to recover the property. The injunction application was compromised by the parties and it was agreed that the property should be sold and an order made for the distribution of the proceeds of sale.

After payment of the costs of sale and the capital advanced under the loan agreement, the parties agreed that the sum of £140,000 would be “ring-fenced” and paid to either party subject to terms to be determined by the parties. These terms were recorded in a settlement agreement. The parties then entered into negotiations about how that amount should be shared between them. The correspondence was marked variously “without prejudice and subject to contract” and “subject to contract”.

Later in the negotiations, Joanne changed its legal representative. Moneything’s solicitor sent Joanne’s new solicitor a letter enclosing a draft consent order which contained “a number of terms that had not previously been discussed”. He further explained that the draft consent order was in Word format to allow track-changes to be made. Joanne’s solicitor did not respond and Moneything’s solicitor subsequently applied to court for an order on the terms set out in the draft consent order.

Joanne argued that no binding agreement had been reached, as the negotiations had been conducted “subject to contract”.

High Court decision

At first instance, Mr Anthony Metzer QC found in favour of Moneything and held that a binding agreement had been formed, despite the parties’ use of the label “subject to contract” in the majority of (but not all) the correspondence. In coming to his decision, Mr Metzer QC noted that while there remained certain administrative matters to be agreed, they were not material for the purposes of the settlement. The court ruled, therefore, that the agreed terms were sufficiently complete to amount to an enforceable contract.

Court of Appeal decision

The Court of Appeal unanimously overturned the decision of the High Court.

In his judgment, Lord Justice Lewison found that, in the first instance decision, Mr Metzer QC had placed too much weight on whether the agreed terms were sufficiently complete to amount to an enforceable contract. In doing so, the High Court decision “seriously undervalued the force of the ‘subject to contract’ label on the legal effect of the negotiations”.

In considering its decision the Court of Appeal confirmed:

  1. That parties could get rid of the qualification of “subject to contract” only if:
    • They both expressly agreed that it should be removed; or
    • If such an agreement was to be necessarily implied
  2. The question of whether parties intend to enter into a legally binding contract is to be determined objectively but the context is still “all-important”.  

In this case it was held that, undoubtedly, there was no express agreement that the “subject to contract” qualification should be removed. The court therefore went on to consider whether such agreement should be necessarily implied and concluded that was not the case. The alleged offer and acceptance were each headed “without prejudice and subject to contract”. Furthermore, drawing a comparison with the earlier settlement agreement signed by the parties, the court noted the letter from Moneything’s solicitor enclosing the draft order plainly contemplated that a consent order was required to embody the settlement and “in the context of negotiations to settle litigation which are expressly made 'subject to contract,' the consent order is the equivalent of the formal contract”.

The Court of Appeal therefore ruled that it was not reasonable to conclude a concluded contract had been made and allowed Joanne’s appeal.

Comment

The Court of Appeal’s judgment is not surprising but serves as a reminder to parties to consider settlement communications carefully. The words “subject to contract” are often used in negotiations as a matter of course. However parties should consider the implications of doing so and this case is a reminder of the potential consequences.

It is important to clearly mark settlement communications and negotiations as “subject to contract” until such time as the parties are ready to execute and be bound by a formal contract to avoid a later dispute about whether agreement was reached. Although parties should bear this in mind, the position appears to be clear. It is possible under English law for legally binding agreements to be formed in the absence of specific formalities, but parties should be aware that where any part of negotiations are said to be “subject to contract”, contractually binding arrangements will not be formed until agreement is reached. In the absence of a formal contract, a clear factual basis for inferring the parties intended to remove the qualification will be required – strong evidence will be needed to demonstrate this without an agreement.

Joanne Properties Limited v Moneything Capital Limited and another [2020] EWCA Civ 1541

 

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