If it’s still ‘subject to contract’ it probably isn’t binding

The ‘subject to contract’ label is often used in the course of negotiations to settle litigation

2 December 2020

For many people, the first encounter with the words ‘subject to contract’ is probably when buying or selling a house. In that context, you may notice these words on all the correspondence from the estate agent and between solicitors until the contracts for the sale of the property are formally exchanged. These words are the label applied to correspondence and documents when parties want a matter to remain in negotiation until a formal contract is executed. The label is not limited to use in contracts for the sale of properties, it is applied in many other contexts. The ‘subject to contract’ label is often used in the course of negotiations to settle litigation, as it was in the recent case of Joanne Properties Ltd v (1) Moneything Capital Ltd (2) Moneything (Security Trustee) Ltd [2020] EWCA Civ 1541.

The decision in this case is significant because it highlights the importance of the presence of the ‘subject to contract’ label when deciding whether or not there is a binding agreement.

The key facts

In December 2018, the Claimant issued a claim against the Defendants (its lender) to set aside a loan agreement and a legal charge which the Defendants held over the Claimant’s property (the “Property”). The Claimant also applied for an injunction against the Receivers appointed by the Defendants to prevent them from taking any further steps to sell the Property to repay the loan.

The parties eventually settled matters and entered into a signed settlement agreement. The agreement provided, among other things, for the sale of the Property and for £140,000 to be ring-fenced from the sale proceeds representing “sums that may be determined to be payable to [either party] subject to the terms on which the claim is resolved”. In May 2019, the parties’ solicitors entered into further correspondence about how the ring-fenced £140,000 was going to be distributed between the Claimant and the Defendants. With the exception of one offer in June 2019 labelled ‘Without Prejudice Save As To Costs’, the correspondence between the solicitors was labelled ‘subject to contract’ or ‘without prejudice and subject to contract’. It was in relation to the distribution of the £140,000 that a further dispute arose. The Defendants asserted that agreement on this issue had been reached.

Was the further agreement binding?

In short, the lower court judge found that it was. However, the Court of Appeal overturned that decision and unanimously held that the parties had not reached a further binding agreement and this was largely because of the presence of the ‘subject to contract’ label.

Lord Justice Lewison said that the lower court judge had “…seriously undervalued the force of the ‘subject to contract’ label on the legal effect of the negotiations” and had applied the wrong test because he was not referred to one case which held that even if the parties are ‘of one mind’ on the terms, if the negotiations are ‘subject to contract’ throughout there is no binding agreement until a formal contract is executed (Sherbrooke v Dipple) and another case which held that the words ‘subject to contract’ could only be waived if the parties expressly, or by necessary implication, agreed that they should be waived (Cohen v Nessdale Ltd).

The Court of Appeal found that there was no binding agreement in this case mainly because:

  • The correspondence between solicitors was labelled ‘subject to contract’ (or something similar) throughout;
  • There was no express agreement to remove the ‘subject to contract’ label;
  • There was no factual basis for inferring that the parties intended to remove the ‘subject to contract’ label;
  • It was contemplated in correspondence that a consent order would be needed to embody the compromise; and
  • There was no formal contract executed.

Comment

It is not uncommon for disputes to arise out of this type of situation. The Joanne v Moneything case reinforces the principle that parties using the label can generally be confident that an agreement will not be binding until a formal written contract is executed. In short, if you do not intend to be bound until a formal written contract is executed, make sure you use the ‘subject to contract’ label. However, each case is fact specific and it would be wrong to simply assume that the presence of the label always means that a formal contract is required. There are exceptions that could affect whether or not an agreement is legally binding, such as partial performance or removal of the label by express or implied agreement. Further, if the context isn’t quite the same, a very different principle may apply (for example, where parties intend to be legally bound but an agreement is incomplete), but that’s a discussion for another blog.

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