“Subject to contract” wording in settlement negotiations: a label that sticks

It is commonplace in commercial transactions for communications to be marked “subject to contract”. The extent to which the label has effect in settlement negotiations was put to the test in Joanne Properties Ltd v Moneything Capital Ltd and another, where the Court of Appeal provided guidance on this, particularly whether agreement that the qualification is expunged may be necessarily implied.

Background

Joanne Properties Ltd (“Joanne”) owned a building in Wandsworth. It borrowed money from the respondents, secured by a legal charge over the property. Joanne fell into arrears under the charge and the respondents appointed LPA receivers. Joanne issued a claim against the respondents to set aside the loan agreement and the charge, as well as an injunction against the receivers on the basis that they had been procured by undue influence.

The parties subsequently agreed, in a formal written agreement signed by each party, that the property should be sold and that the proceeds of sale be distributed. After the payment of the costs of sale and capital advanced:

• The sum of £140,000 was to be ring-fenced, representing “sums that may be determined to be payable to [either party] subject to the terms on which the claim is resolved”.
• Any balance was to be ring-fenced for the resolution of a dispute relating to another charge over the property in favour of a third party.

The issue before the Court of Appeal was whether the parties reached a further binding agreement about how the sum of £140,000 was to be shared between them.

The communications

Both parties were represented by solicitors. The respondents’ solicitors wrote “subject to contract” in an email to Joanne’s solicitors, to which they responded with a “without prejudice and subject to contract” counter-offer. The respondents’ solicitors then made a formal written offer “without prejudice save as to costs”. The offer was believed by both parties to be a Part 36 offer even though the offer was not compliant with CPR 36.

The offer was not accepted, and Joanne’s solicitors made a subsequent offer headed “without prejudice and subject to contract”. There were then further “subject to contract” negotiations where the parties agreed that a payment would be made to the respondents, but Joanne’s solicitors explained that counsel was away and that they would liaise with counsel to put a proposal “to achieve the desired end”.

The respondents’ solicitors subsequently wrote to express their “understanding that the claim has been settled on terms”, and enclosed a consent order to dispose of the proceedings. In the absence of a response from Joanne’s solicitors, the respondents’ solicitors proceeded to apply to court for an order in the terms as drafted.

Joanne had changed solicitors and they responded to state that there had been no binding settlement because the negotiations had been conducted “subject to contract”.

At first instance, the judge found that a binding contract of compromise had been made. His reasons were:

• The only real issue in dispute was the destination of the ring-fenced sum of £140,000.
• The correspondence referred to a full and final settlement, not a partial settlement.
• No mention was made in correspondence of any other terms of the agreement.
• The appellant subjectively thought that the dispute had been compromised.
• Although there remained certain administrative matters to be agreed, they were not material for the purposes of the settlement.

The law

In Sherbrooke v Dipple, it was confirmed that, once negotiations had begun “subject to contract”, that condition was carried all the way through the negotiations. The court approved the formulation in Tevanan v Norman Brett (Builders) Ltd, that “parties could get rid of the qualification of ‘subject to contract’ only if they both expressly agreed that it should be expunged or if such an agreement was to be necessarily implied.”

Meanwhile, in Cohen v Nessdale Ltd, the Court of Appeal reaffirmed the court’s approach in Sherbrooke, namely that it is for very good reasons the “subject to contract” formula enables one to see immediately whether there is a contract. Where negotiations are carried out “subject to contract”, the mere fact that parties are of one mind is insufficient. There must be a formal contract, or clear factual basis for inferring that parties intended to remove the “subject to contract” qualification.

Decision

The Court of Appeal overturned the judge’s decision. It held that the judge had seriously undervalued the force of the “subject to contract” label on the legal effect of negotiations between the solicitors. The court held that “subject to contract” meant that:

• Neither party intended to be bound either in law or in equity unless and until a formal contract was made.
• Each party reserved the right to withdraw until such time as a binding contract was made.

As the settlement negotiations started “subject to contract”, that condition was carried all the way through subsequent negotiations.

The court also observed that it was plainly contemplated 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.

Comment

When entering settlement negotiations, it is important to consider the effects of the label “subject to contract”, whether as the party making the offer or responding to one.

The question of whether parties intend to enter a legally binding contract is always to be determined objectively, but the decision in Joanne Properties highlights that the court will be reluctant to treat the qualification as expunged without express agreement to that effect. After all, the label is important so that parties can see whether they are still in the negotiation stage or when there is a contract; otherwise, as the court said in Sherbrooke, “all is difficulty”.

The Court of Appeal’s decision also provides useful guidance on Part 36 offers. The respondents placed “particular stress” on the purported Part 36 offer, effectively submitting that it “recalibrated” the discussions between the parties, which proceeded thereafter on the basis of offers and counter-offers capable of acceptance.

The Court of Appeal rejected this argument and provided a reminder that, as is settled law, a Part 36 offer is not like an offer in the ordinary law of contract and that it is an ordinary occurrence for without prejudice negotiations often to take place in parallel with such an offer.

This article was first published on Practical Law.