Binding Agreement or Subject to Contract?
A Deputy High Court judge seriously undervalued the force of a subject to contract label on the legal effect of negotiations.
So held a unanimous Court of Appeal today in Joanne Properties Limited v (1) Moneything Capital Limited and (2) Moneything (Security Trustee) Limited [2020] EWCA Civ 1541 (Lewison, Rose and Stuart Smith LJJ)
Joanne Properties, which had borrowed money from the respondents secured by a legal charge, fell into arrears.
LPA receivers were appointed. Joanne challenged the appointment alleging the loan agreement and the charge had been procured by undue influence.
Joanne issued a claim against Moneything seeking to set both aside. It also claimed an injunction against the receivers to prevent them taking further steps to realise the security.
The issue on appeal was whether the parties entered into a binding contract during negotiations following the compromise of that application for an injunction.
Did the parties reach a further binding agreement about how a sum of £140,000 was to be shared between them?
Solicitors Mr Irvine (IR) (for Moneything) and Mr Goldberg (G) (for Joanne) represented the parties.
IR introduced the subject to contract label as early as an email to G on 29 May 2019.
In the course of a telephone call between himself and G on 13 June, IR put forward a different offer without prejudice and subject to contract.
On 19 June IR made a more formal written offer headed without prejudice save as to costs.
It was clearly intended to be capable of acceptance but it was not accepted.
G’s subsequent proposal of 21 June was again headed without prejudice and subject to contract.
His improved offer of 26 June was headed in the same way.
IR and G spoke on 11 July and G proposed that £72,000 of the ring-fenced sum of £140,000 would be released to Moneything.
IR’s attendance note recorded: “[G] confirmed that this was a firm offer with instructions from [Joanne] to make to [Moneything] and if accepted, that was the matter concluded, save that we still had to work out the mechanics of how the funds got released from the ring fenced sums”.
On 11 July IR emailed G with the heading Without prejudice and subject to contract.
His clients would accept £75,000 from the ring-fenced sum “mechanics and terms to be agreed”.
As IR had proposed the release of £75,000 rather than £72,000 that was a counter-offer rather than an acceptance of G’s proposal.
G replied later in the day. The subject line in the email read Without prejudice and subject to contract.
The first word of the email was “Agreed”. He added that counsel was away, that he would liaise with counsel and “put a proposal to you to achieve the desired end.”
Later in the month Joanne changed solicitors. They were now represented by Mr Smith (S).
On 24 July IR wrote to S again headed Subject to contract, this time in upper case bold font: “We trust that your instructions accord with our understanding that the claim has now been settled …”
He enclosed a consent order to dispose of the proceedings. It contained a number of terms that had not previously been discussed.
In due course Moneything applied to the court for an order in those terms.
It prompted a reply from S that there had been no binding settlement because the negotiations had been conducted subject to contract.
The phrase subject to contract was a well-known phrase in ordinary legal parlance. Statements of its effect were legion.
“… for over a hundred years the courts have held that the effect of the words subject to contract is that the matter remains in negotiation until a formal contract is executed.” Tiverton Estates Ltd v Wearwell [1975] Ch 146,159 (per Lord Denning).
“…when used in relation to the sale of land, [it] means that, although the parties have reached an agreement, no legally binding contract comes into existence until the exchange of formal written contracts takes place.” Secretary of State for Transport v Christos [2003] EWCA Civ 1073, [2004] 1 P & CR 17 (per Mummery LJ).
The principle was not confined to the sale of land. See the Supreme Court’s decision in relation to a contract for the supply and design of machinery: RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14, [2010] 1 WLR 753.
Once negotiations had begun subject to contract in the ordinary way that condition was carried all the way through the negotiations: Sherbrooke v Dipple (1981) 41 P & CR 173.
Lord Denning MR explained: “But there is this overwhelming point. Everything in the opening letter was subject to contract. All the subsequent negotiations were subject to that overriding initial condition.
“…parties could get rid of the qualification of subject to contract only if they both expressly agreed that it should be expunged or if such an agreement was to be necessarily implied.” Brightman J in Tevanan v Norman Brett (Builders) Ltd (1972) 223 EG 1945 as approved by Lord Denning MR and Templeman LJ.
Templeman LJ added: “It is always the case that in subject to contract negotiations one side or both from time to time speak as though there was a contract or would be a contract and that is because everybody looks on the bright side and thinks a sale is going to take place.”
The Court reaffirmed that approach in Cohen v Nessdale Ltd [1982] 2 All ER 97.
In the present case there was no express agreement that the subject to contract qualification should be expunged and it was undoubtedly not the case that it should be implied.
Unfortunately, the judge was not referred to either Sherbrooke v Dipple or Cohen v Nessdale Ltd and made the same error as the trial judge in Sherbrooke.
The mere fact that the parties were of one mind was not enough.
There must be a formal contract or a clear factual basis for inferring that the parties must have intended to expunge the qualification. In this case there was neither.