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Court of Appeal provides useful insight into the effect of "subject to contract" qualifications on parties' negotiations

Posted on 10 December 2020

Contract signing

In a recent judgment (Joanne Properties v Moneything Capital), the Court of Appeal elaborated upon the meaning of the phrase "subject to contract" in the context of negotiations between parties' solicitors. The issue in this particular case was whether a binding contract had been reached between the parties in written communications between their solicitors which were labelled "subject to contract". The Court of Appeal overturned the lower Court's decision and found that no contract had been formed due to the presence of the qualification and provided useful insight into the scope, meaning and effect of the well-known legal phrase.

Background

Proceedings were brought to set aside a loan agreement and charge over property, on the basis that they were procured by undue influence, and an injunction against receivers realising the security. The parties then compromised the injunction application by agreeing that the property be sold, and an order for distribution of the proceeds. However, an issue arose as to whether a further binding agreement had been reached as to how a ring-fenced sum of £140,000 was to be shared between the parties. The solicitors' correspondence negotiating the issue had been conducted "subject to contract".

"Subject to contract"

When assessing whether two parties intended to enter into a binding contract, a Court will determine this objectively, but also against the particular context, which in this case was the use of the phrase "subject to contract".

As a well-known legal phrase, there have been a number of cases over the years which have determined its meanings. These include that the matter remains in negotiation until a formal contract is executed and that neither party intends to be bound in law or in equity until a formal contract is made and, until then, each party reserves the right to withdraw until such a binding contract is made.

Further, once negotiations have begun "subject to contract", that condition is carried all the way through negotiations, and all subsequent negotiations are also subject to that overriding condition. Parties can only get rid of the "subject to contract" qualification, if they both expressly agree that it should be expunged or if such an agreement to expunge is necessarily implied, for example, due to the conduct of the parties.

Decision

Applying these principles to the scenario, the Court of Appeal overturned the Deputy Judge's decision, who had decided that a binding contract had been reached, despite the use of "subject to contract". The Court commented that the judge had seriously undervalued the force of the "subject to contract" label on the legal effect of the negotiations.

The Court of Appeal took the "undoubted" view that there was no implied agreement between the parties that the "subject to contract" qualification be removed, as all of the correspondence between the parties had been headed "without prejudice and subject to contract". In the context of negotiations to settle litigation which are expressly made "subject to contract", the consent order was the equivalent of the formal contract. Clearly as well, there had been no performance of the contract.

Whilst there had been a (purported) Part 36 offer in the case, which had recalibrated the status of the negotiations, this did not impact on the use of the "subject to contract" label, as it was effectively a parallel offer.

Commentary

The Court of Appeal concluded with a reminder that where negotiations are conducted "subject to contract", the parties being of 'one mind' is not enough. There must be a formal contract, or a clear factual basis allowing an inference that the parties must have intended to 'get rid' of the subject to contract qualification.

While the Court described "subject to contract" as a well-known phrase in ordinary legal parlance, its judgment serves as a practical reminder for parties to ensure they carefully document negotiations and agreements and clearly record their intentions, to avoid any ambiguity or disputes arising in the future.

The decision will no doubt be welcomed by those lawyers who may not, in practice, be brought into contractual negotiations until quite late on in the day by their commercial counterparts. Parties that wish to argue that that a binding contract had inadvertently been formed, despite the legal formalities not having been completed and the negotiations being "subject to contract", will face a very high hurdle.  The situation may be different of course if the parties start to perform under the contract before the agreement is concluded.

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