This recent Court of Appeal decision in Joanne Properties Ltd v Moneything Capital Ltd  EWCA Civ 1541 considers whether parties had entered into a binding contract of compromise contained in written communications passing between their respective solicitors.
Joanne Properties Ltd owned a building in Wandsworth. Joanne borrowed money from Moneything Capital Ltd secured by a legal charge over the property. 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 which included 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 terms of the formal written compromise agreement included a sum of £140,000 to be ring-fenced, representing “sums that may be determined to be payable to [either party] subject to the terms on which the claim is resolved”.
The question for the Court of Appeal was whether the parties reached a further binding agreement contained in communications between their respective solicitors about how the sum of £140,000 was to be shared between them.
The solicitor for Moneything introduced the “subject to contract” label which was communicated to Joanne’s solicitor. There was then a formal written offer headed “without prejudice save as to costs”. Although not a Part 36 compliant offer, it was treated as such. The 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 were not agreed.
Later that month 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 was no binding compromise because the negotiations had been “subject to contract”. Moneything made an application for an order on the basis that there had been a concluded agreement.
The Court of Appeal considered that the label of “subject to contract” has a significant effect on negotiations such that there had not been a concluded agreement in this case.
Lewison LJ provides an overview of the origins of the principle “subject to contract” which is a well-known phrase in ordinary legal parlance 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 (per Lord Denning in Sherbrooke v Dipple (1981) 41 P & CR 173).
Lewison LJ differentiates “subject to contract” negotiations which are different in principle from incomplete agreements where parties have agreed the main terms but have left other terms to be agreed later.
In the present case, besides the clear label of negotiations as “subject to contract” and in the absence of any agreement to remove the condition, there was also the contemplation that a consent order would be needed to embody the compromise. The consent order would have been the equivalent of the formal contract which did not happen.
Moneything argued that the formal written offer which was taken by both parties to be a Part 36 offer recalibrated the negotiations such that they continued as offers and counter-offers. The court did not agree. A Part 36 offer is not like an offer in the ordinary law of contract. In the ordinary law of contract, an offer which is rejected cannot subsequently be accepted. That is not true of a Part 36 offer, which may be accepted even after the offeree has put forward a different proposal. The court found that it was not a legitimate inference that making a Part 36 offer recalibrates attempts to compromise a dispute which are taking place in parallel.
This significant decision reiterates the importance of the phrase “subject to contract” for parties using these words daily to attempt to compromise disputes. The “subject to contract” formula enables parties to see at once whether there is or is not a contract or whether the parties are in the negotiation stage. Without this principle there would be considerable uncertainty in law about those agreements that have been concluded and those that have not.
Kate Richmond has a successful and varied practice across the full range of civil work in Chambers. She accepts instructions in a range of common law matters including Property, Landlord & Tenant, Commercial, Personal Injury, Probate and Trusts. Read more about her expertise here.