‘Subject to contract’ – The effect of these words in settlement negotiations

In the recent case of Joanne Properties Limited v Moneything Capital Limited and another [2020] EWCA Civ 1541, the Court of Appeal over-turned the original court’s decision that a binding agreement had been formed despite communications being ‘subject to contract’. Although not a surprising decision, it serves as a reminder of the effect and significance of labelling communications ‘subject to contract’.

Background

Joanne Properties Limited (Joanne) borrowed money from Moneything Capital Limited (Moneything), secured by a legal charge over Joanne’s property in Wandsworth. Joanne later fell into arrears and Moneything appointed receivers to recover the loan.

Joanne contested the appointment of the receiver and sought an injunction against the receivers to prevent them from taking further recovery steps.

The parties compromised the application for the injunction. They agreed the property would be sold and an order made for distribution of the proceeds.

A sum of £140,000 was to be ‘ring-fenced’ and paid to either party subject to terms which the parties were still to resolve. The fact that this sum was to be ring-fenced was agreed in a formal contract signed by both parties. The parties entered into negotiations as to how the ring-fenced sum was to be distributed.

Was there a binding agreement?

The issue in this case was whether a binding agreement had in fact been reached between the parties with regards to the distribution of the ring-fenced sum of £140,000. The issue arose due to the parties’ use of the ‘subject to contract’ label.

Save for a purported Part 36 settlement offer (a formal written offer which can have consequences in relation to legal costs), all communications between the parties’ solicitors included the reference ‘without prejudice and subject to contract’ or similar words. Towards the end of the communications, Joanne changed legal representatives. Moneything’s solicitors sent Joanne’s new solicitors a draft consent order addressing the dispersal of the £140,000 on terms that had not been agreed. Moneything’s solicitors said they would apply to the court for an order in those terms and proceeded to do so.

Joanne commenced proceedings arguing that no binding agreement had been reached, as the negotiations were all ‘subject to contract’.

First instance court’s decision

At first instance, the court held that there was a binding agreement between the parties for a number of reasons, including:

• The correspondence between the parties was for full and final settlement and not for partial settlement;
• There was no mention of any further terms of the agreement in the correspondence; and
• There were administrative points to agree but nothing material to the terms for settlement purposes.

Joanne appealed the decision to the Court of Appeal.

Court of Appeal decision

The court emphasised that ‘subject to contract’ is a well-known label used in legal negotiations and the question whether two persons intend to be legally bound is to be decided objectively.

Lewison LJ cited Sherbrooke v Dipple (1981) where it was held that once negotiations have begun ‘subject to contract’, all subsequent negotiations would be subject to this condition, unless both parties expressly or by implication agreed that it should not apply.  It was not for the parties to assume that negotiations would continue until they became binding and the ‘subject to contract’ qualification ceased to have effect or was replaced by a new contract. It was also not for the court to impose a binding contract on the parties which they had not reached. The question of whether a binding contract has been entered into will depend on the circumstances in each case.

In this case, Lewison LJ stated, “there was undoubtedly no express agreement that the ‘subject to contract’ qualification should be expunged.” This could also not be implied as the previous offers had been headed ‘subject to contract’ and it was contemplated that a consent order would be necessary to embody the parties’ compromise. This was the position with the earlier settlement agreement, which had been negotiated and embodied in a formal written contract. When conducting negotiations to settle litigation, which are ‘subject to contract’, the consent order is the equivalent of the formal contract. The parties must agree the terms for the ‘subject to contract’ label to fall away.

Moneything’s solicitors argued that when the Part 36 offer was made, it essentially reset the discussions so that the parties then proceeded on the basis of offers and counter-offers capable of being accepted. Lewison LJ clarified that Part 36 offers are separate from ordinary offers under the law of contract and run parallel to any ‘without prejudice’ or ‘subject to contract’ negotiations. The Part 36 offer is essentially a free-standing offer, and does not re-set the settlement attempts taking place in parallel. The court emphasised that even if the Part 36 offer did reset the status of the ‘subject to contract’ label, the parties’ subsequent communications re-introduced the ‘subject to contract’ status.

Going forward

This was not a surprising decision from the Court of Appeal, but it highlights the effect of using the ‘subject to contract’ label during settlement negotiations and communications. Identifying communications in the course of ongoing negotiations as ‘subject to contract’ means that neither party intends to be bound (legally or equitably) unless and until a formal agreement has been reached or it can be clearly inferred from the facts in the particular case that the parties intended that the ‘subject to contract’ qualification should no longer apply. Until then, each party has the right to withdraw.

Parties in the course of settlement or other negotiations would be wise to include the ‘subject to contract’ label once it has been introduced into negotiations, until such time that both parties are ready to be bound by a formal agreement.

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