Are we in agreement…? Guidance on use of ‘subject to contract’ label

Insight

04.12.2020

In a recent decision, Joanne Properties Ltd v Moneything Capital Ltd, the Court of Appeal has provided helpful guidance confirming that where negotiations are ‘subject to contract’, there will be no legally binding agreement unless: (i) a formal contract is entered into; or (ii) the facts show that the parties clearly intended to remove the ‘subject to contract’ qualification.

‘Subject to contract’ is a useful label which is usually understood to mean that the parties are still negotiating and have not yet reached a final, binding agreement. It helps parties to see at once whether there is a binding contract, or whether they are still in the negotiation stage. However, parties should bear in mind that although the ‘subject to contract’ label does help rebut a presumption of intention to create contractual relations (a key element for the formation of a contract), it is not definitive. When considering whether an agreement is legally binding, the court will assess all the facts and ask whether a reasonable person would regard it as such (an objective test).

The key takeaways are that, when negotiating a settlement:

Parties should ensure that any document which is not intended to be legally binding is clearly labelled or titled ‘subject to contract’.
Conversely, if a document or parts of it are intended to be legally binding, then this should be made clear in the body of the document (and the ‘subject to contract’ label should not be used as a label or title). The parties should also state explicitly that the ‘subject to contract’ negotiations have come to an end, if that is their intention.

Background

The appellant, Joanne Properties Ltd (“JPL”) and the respondents, Moneything Capital Ltd (“MCL”), had entered into a financing agreement which was secured over a property in Wandsworth. A dispute arose between the parties which resulted in JPL issuing proceedings against MCL. As an interim measure, the parties agreed that the Wandsworth property should be sold and, after payment of costs and the capital due under the loan agreement, the sum of £140,000 should be paid into a ring-fenced account.

The parties’ solicitors then entered into negotiations to attempt to agree how the ring-fenced sum should be divided between the parties. During those negotiations:

MCL made a written offer headed ‘without prejudice save as to costs’ (but not ‘subject to contract’), which was rejected by JPL.
On 11 July 2019, MCL made another offer in similar terms which was headed ‘without prejudice and subject to contract’. That offer was to accept £75,000 from the ring-fenced sum, “with mechanics and terms to be agreed”. JPL’s response (sent later that day, and also labelled ‘without prejudice and subject to contract’) said that this was “agreed” and that JPL would put forward a proposal to MCL “to achieve the desired end” after consulting with counsel.
On 24 July 2019, MCL wrote to JPL with a draft consent order incorporating additional terms which had not previously been discussed. The letter was headed ‘subject to contract’. JPL refused to sign the consent order.

MCL applied to court for an order that there had been a concluded agreement between the parties. JPL’s position was that there was no binding settlement because the negotiations had been conducted ‘subject to contract’.

At first instance, the High Court held that there was a binding agreement between the parties. JPL appealed that decision.

Judgment

Allowing JPL’s appeal, the Court of Appeal found that the first instance judge’s conclusion that a binding agreement had been reached “seriously undervalued” the force of the ‘subject to contract’ label on the legal status of the negotiations.

Lewison LJ (giving the leading judgment) made clear that whether parties intend to enter into a legally binding contract must be determined objectively, but the context is all-important. In this case the most important feature of the context was the use of the phrase ‘subject to contract’.

The judge went on to say that ‘subject to contract’ is a well-known phrase in ordinary legal parlance and means that:

neither party intends to be bound (in law or equity) unless and until a formal contract is made; and
each party has the right to withdraw until such time as a binding contract is made.

Once negotiations have begun ‘subject to contract’ (as they did between JPL’s and MCL’s solicitors), that condition “is carried all the way through the negotiations” unless the parties have expressly agreed otherwise (or if such agreement can be necessarily implied).

In this case, there was no agreement (either express or implied) that the ‘subject to contract’ condition should be removed. Both MCL’s offer and JPL’s acceptance on 11 July 2019 were labelled ‘without prejudice and subject to contract’, as was MCL’s letter of 24 July 2019. Furthermore, it was clearly contemplated that a consent order – the “equivalent of the formal contract” in the context of negotiations to settle litigation – would be needed. JPL had refused to sign the consent order; there was therefore no binding agreement.

If you require further information about anything covered in this briefing, please contact Ben Longworth, Lucy Penn, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.