UK: Sign On The Dotted Line - Subject To Contract

In the recent case of Joanne Properties Ltd -v- Moneything Capital Ltd and another [2020] EWCA Civ 1541, the Court of Appeal has reconfirmed the position on documents marked subject to contract during negotiations. It was confirmed that once parties have stated to negotiate on a 'subject to contract' basis, the courts will not assume that they have changed their overall negotiating stance and agreed a contract, unless there is express agreement to do so or that is the necessary implication from their words or conduct.

Facts

The claimant/appellant (JPL) commenced proceedings against the respondents (Moneything) to set aside a loan agreement and charge over a property in Wandsworth, and for an injunction to prevent Moneything realising its security. The parties compromised the proceedings by agreeing that the property could be sold and an order made for distribution of the proceeds (some £140,000). An issue then arose as to whether they had reached a further binding agreement about how a ring-fenced sum should be allocated between them - JPL having changed solicitors in the interim. Their solicitors' correspondence negotiating all this had been conducted 'subject to contract' and proceeded through various iterations with a draft consent order being circulated, purportedly containing agreed terms undercover of a letter marked 'subject to contract'. The new solicitors did not confirm the draft consent order sent over by Moneything's solicitor, who then applied to the court for an order in the terms of the draft order. The new solicitors argued that there had been no binding settlement because all the negotiations had been conducted 'subject to contract'.

At first instance, the judge held that a binding contract had been made.

Findings

Allowing JPL's appeal, the Court of Appeal has held that parties' solicitors' written communications did not establish a binding contract for settlement of a dispute. Where negotiations were stated as 'subject to contract', there could be no binding agreement until a formal contract was made. The case provides a useful reminder of the principles applying to the concept of 'subject to contract'.

The Court of Appeal clarified that there was undoubtedly no express agreement between the parties that the 'subject to contract' qualification should be withdrawn, and more importantly that this could not be implied. It was envisaged that a consent order would be needed to embody the compromise. In the context of negotiations to settle litigation, expressly made 'subject to contract', the consent order is the equivalent of the formal contract.

The Court of Appeal emphasised the force of the 'subject to contract' label on the legal effect of the negotiations. There are two considerations; whether the parties intended to enter into a legally binding arrangement, and whether the agreed terms were sufficiently complete to amount to an enforceable contract. Both considerations were required before the 'subject to contract' designation would be lifted. Whether parties intended to enter into a legally binding contract will be looked at objectively.

It was noted that the first instance judge had not been referred to two important decisions on this topic - Sherbrooke -v- Dipple [1981] 41 P & CR 173, where it was held that, once negotiations had begun 'subject to contract', that condition was carried all the way through the negotiations, or Cohen -v- Nessdale Ltd [1982] 2 All ER 97, which states that, for good reasons, the 'subject to contract' formula should be immediately ascertained as to whether there is in fact a contract in existence.

JPL was therefore successful in its appeal.

Points to note

Where negotiations are carried out on a 'subject to contract' basis, the fact that the parties are of one mind is insufficient. It is still a requirement that there is a formal contract in place, or at the very least clear factual basis for inferring that parties intended to remove the 'subject to contract' qualification.

The case is a useful reminder of when the concept of 'subject to contract' applies, the reasons for it, and what is required to move from that stage of any negotiations to a formal contract.

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