A recent Court of Appeal decision has reiterated the significance of appropriately labelling documents during negotiations.

In Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541 the Court considered whether written communications between the parties solicitors amounted to a binding contract of compromise.

FACTUAL BACKGROUND

Joanne Properties Ltd ("Joanne") owned a building in Wandsworth, over which Moneything Capital Ltd ("Moneything") had a legal charge as security for sums borrowed by Joanne. Joanne fell into arrears and Moneything appointed LPA receivers. Joanne challenged the appointment claiming that the loan agreement and charge were procured by undue influence. Joanne issued a claim in which it sought an injunction preventing the LPA receivers from taking steps to realise the security.

The parties subsequently compromised the injunction application by agreeing that the property should be sold, and the proceeds of sale distributed. The question for the Court of Appeal was whether the parties had reached a further binding agreement in communications between their respective solicitors about how a ring-fenced sum was to be shared between them.

In negotiations around the ring-fenced sum, the solicitor for Moneything introduced the “subject to contract” label. There was then a formal written offer headed “without prejudice save as to costs”, which was treated as a Part 36 Offer. That offer was not accepted. Joanne’s subsequent offer was headed “without prejudice and subject to contract”. There were further “subject to contract” negotiations which resulted in an agreed figure to pay to Moneything, but the mechanics of the payment had not been agreed.

Joanne changed solicitors before any consent order or proposal for the mechanics of the payment had been agreed. Joanne’s subsequent position was that there had been no binding compromise because the negotiations had all been “subject to contract”. Moneything made an application for an order on the basis that there had been a concluded agreement.

KEY LEGAL POINTS

The Court of Appeal held that the label “subject to contract” has a significant effect on negotiations and determined that there had not been a concluded agreement.

It summarised the principle “subject to contract” as a phrase meaning that:

• Neither party intends to be bound either in law or in equity unless and until a formal contract is made; and that
• Each party reserves the right to withdraw until such time as a binding contract is made.

Once negotiations are stated as being “subject to contract” that condition is carried all the way through the negotiations. For a contract to be concluded there must be a formal contract, or clear factual basis for inferring that parties intend to remove the "subject to contract" qualification. Further, a Part 36 offer would not "recalibrate" an attempted compromise, removing it from being subject to contract.

COMMENTARY

The judgment shows the importance of the words “subject to contract”. It is widely used in communications when parties are negotiating in an attempt to compromise disputes. The formula enables parties to see at once whether there is or is not a contract or whether the parties are still in the negotiation stage. This firm principle avoids uncertainty in law about whether agreements that have been concluded or not.