Subject to contract negotiations: Joanne Properties v Moneything Capital Ltd [2020] EWCA Civ 1541

Published: 15/12/2020

The "subject to contract" label should be used with caution, and parties should be careful to ensure that where it has been used, during any stage of negotiations, a formal contract is reached before the agreement is to be taken as binding.

In the recent case of Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541 it was confirmed that where negotiations are carried out "subject to contract", that condition is carried all the way through the negotiations, unless the parties expressly agree that it should be removed, or if such an agreement was to be necessarily implied.

Facts

The Claimant had a loan from the Respondent secured by a legal charge over a property that the Claimant owned. After the Claimant fell into arrears, the parties entered into a dispute but later agreed that the property would be sold, with £140,000 to be ring-fenced for either party when the dispute was resolved.

The issue before the court was whether the parties later reached a further binding agreement about how the £140,000 would be shared between them.

The alleged agreement was made via inter-solicitor communications. Various offers and counter-offers were sent back and forth between solicitors. In the most part, these were labelled “subject to contract”, although towards the end of these negotiations the Respondent’s solicitor put forward a formal offer headed “without prejudice save as to costs” (but not headed “subject to contract”). At the time this was interpreted as a CPR Part 36 offer (although it is now common ground that the offer was not compliant with CPR Part 36).

After receipt of this offer, the Respondent’s solicitors wrote to the Claimant’s solicitors stating "We trust that your instructions accord with our understanding that the claim has been settled on terms…". This letter was again headed "subject to contract", and enclosed a consent order to dispose of the proceedings. On not receiving a response from the Claimant’s solicitor, the Respondent applied to the court for an order in those terms. Upon the application being issued and served, the Claimant took the position that there had been no binding settlement because the negotiations had been conducted "subject to contract", and applied to the court in this regard.

The Decision

In the High Court Mr Anthony Metzer QC held that the parties had entered into a binding contract by virtue of the inter-solicitor correspondence. His reasons included that the correspondence referred to a full and final settlement, not a partial settlement, that no mention was made in correspondence of any other terms of the agreement, and that the Claimant subjectively thought that the dispute had been compromised. However, this was overturned on appeal.

Lord Justice Lewison took the approach that "whether two persons intend to enter into a legally binding contract is, of course, to be determined objectively. But the context is all-important". For this case, he held the most important feature of the context is the use of the phrase "subject to contract".

The phrase "subject to contract" is a well-known one:

"The meaning of that phrase is well-known. What it means is that (a) neither party intends to be bound either in law or in equity unless and until a formal contract is made; and (b) that each party reserves the right to withdraw until such time as a binding contract is made."

[Generator Developments Ltd v Lidl UK GmbH [2018] EWCA Civ 396 [2018] 2 P & CR 7]

Lewison LJ held that once negotiations have begun "subject to contract", that condition is carried all the way through the negotiations, unless the parties get rid of it by both expressly agreeing that it should be removed or if such an agreement was to be necessarily implied.

In this case, the alleged offer and acceptance were each headed "without prejudice and subject to contract". Letters from the Respondent’s solicitors were similarly headed; and it was also plainly contemplated that a consent order would be needed in order to embody the compromise. 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. Applying an objective approach, he held that the making of an offer without the ”subject to contract” label had not recalibrated the status of the negotiations and the "subject to contract umbrella" had not been lowered.

Guidance on Part 36 offers

Lewison LJ stresed that a Part 36 offer is not like an offer in the ordinary law of contract: in the ordinary law of contract, an offer which is rejected (either expressly or by the making of a counter-offer) cannot subsequently be accepted. That is not true of a Part 36 offer, which may be accepted even after the offeree has put forward a different proposal. The Part 36 offer is, in effect, a free-standing offer. It is not a legitimate inference that the making of such an offer recalibrates attempts to compromise a dispute which are taking place in parallel.

Comment

The "subject to contract" label should be used with caution, and parties should be careful to ensure that where it has been used, during any stage of negotiations, a formal contract is reached before the agreement is to be taken as binding.

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