Keep marking your communications "subject to contract"

Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541

The Court of Appeal confirmed that "subject to contract" does indeed mean that neither party intends to be bound by the discussions until a formal contract has been agreed between the parties. The effect of qualifying communications with the “subject to contract” label is increasingly conclusive of the parties’ intentions whether to be bound by the terms or not. By overturning the High Court’s judgment at first instance, the Court of Appeal does not create any new law, but it is a helpful reminder and confirmation of the legal effect, and the practicalities, of a phrase used so often. We touched on this case briefly in our December update but thought that it warranted a closer look.

This case focuses on the communications (both written correspondence and via telephone) between two sets of solicitors attempting to agree how the balance of a loan, which had been repaid, should be divided between their respective clients. Except for a Part 36 offer (later held to be invalid), all of the correspondence (and settlement offers) exchanged were marked “subject to contract”, or “without prejudice and subject to contract”. The parties’ negotiations eventually reached agreement, and an offer was made with “mechanics and terms to be agreed”, and accepted by the other party, stating that they would “put a proposal to [you] to achieve the desired end”. A week or so later a draft consent order was circulated, again headed “subject to contract”, but this was never agreed or signed.

We know that it can often be easier to create a binding contract than parties think. Therefore, the importance of qualifying correspondence as “subject to contract” should not be underestimated. This case reassures us that it does work.

The Court of Appeal reminds us that it is an objective test as to whether or not the parties have the required intention to create legally binding relations, and that the context of this is crucial. The crucial context in this case was the use of the “subject to contract” labelling of correspondence. During the course of negotiations, this labelling was not used part way through on an (attempted) Part 36 offer, and one party argued that this “recalibrated” the negotiations and removed the “subject to contract” qualification from then onwards. The Court of Appeal however held that where an open Part 36 offer is made in tandem with “Without Prejudice / Subject to Contract” communications and negotiations, these are separate lines of resolution being carried out in parallel and, as such, one does not affect the other.  Subsequent correspondence was labelled again as “subject to contract” and therefore again raised the “subject to contract” qualification. This emphasises the importance of being consistent and thorough with any use of the “subject to contract” label on any and all correspondence (including mentioning verbally when speaking), unless and until the parties intend to be bound.

The Court of Appeal reminds us that the use of the “subject to contract” phrase means that:

1. “neither party intends to be bound either in law or in equity unless and until a formal contract is made”; and
   
   
2. “each party reserves the right to withdraw until such time as a binding contract is made”.

The Court of Appeal held that the fact that the parties had reached agreement by the end of the “subject to contract” negotiations merely indicated that the parties were “of one mind” at that point. Reaching this milestone did not magically remove the “subject to contract” status of the discussions to date - they remained just that until either a formal contract was in existence, or there was clear factual evidence to show that the parties both agreed and intended that the “subject to contract” label should be removed.

A binding contract could not be held to exist in this case because there was neither a signed consent order in place nor any express agreement that the “subject to contract” qualification should be removed (and no such agreement could be implied either on the basis of the facts).

If you require further information about anything covered in this briefing, please contact Antonia Lyne, 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.

© Farrer & Co LLP, May 2021