Legal effect of ‘subject to contract’ reiterated by the Court of Appeal

In the recent case, Joanne Properties Ltd v Moneything Capital Limited and Moneything (Security Trustee) Limited, the English Court of Appeal reiterated the force of the "subject to contract" qualification on the legal effect of negotiations. The Court confirmed that where the qualification “subject to contract” is used, in order to disapply the qualification, there must be a formal contract concluded or a clear factual basis for inferring that all parties have intended to disapply it.

Background

Joanne Properties Ltd (“Joanne”) borrowed a loan from Moneything Capital Limited (“Moneything”) secured by a legal charge over a property owned by Joanne. Joanne subsequently fell into arrears on the loan which resulted in Moneything appointing LPA receivers. Following an initial dispute in which Joanne sought to set aside both the loan agreement and the charge on the grounds of undue influence, the parties entered into a formal written compromise agreement. They agreed that (a) the property was to be sold and the proceeds of sale distributed between them; and (b) after payment of sale costs and repayment of the loan advanced, a sum of £140,000 was ring-fenced for payment of “sums that may be determined to be payable to [either party] and subject to the terms of which the claim is resolved”. The legal issue in the appeal case was whether the parties had reached a further binding agreement as to how the £140,000 was to be shared between them. The subsequent communications with proposals between the parties’ solicitors were expressed to be “subject to contract”. The Court of Appeal held that no binding contract had been made.

Court of Appeal’s decision

The test for determining whether parties have entered into a binding contract is an objective one. The use of the qualification “subject to contract” during negotiations, in communications or on offer letters is part of the context to be taken into account when applying the objective test.

The meaning of the phrase “subject to contract” has been set out in various decisions of the English courts and effectively means that the matter remains in negotiation until a formal contract is completed.

Importantly, the Court of Appeal emphasised that once negotiations have begun “subject to contract", then irrespective of whether that phrase is used consistently in all communications, the starting position must be that the subject to contract qualification prevails throughout the negotiations. This position can only be rebutted where the parties expressly agree that the qualification should be removed or where it can be inferred, on a clear factual basis that the parties have so agreed.

This case serves as a reminder that, in practice, it is important to carefully document negotiations and agreements to clearly record the intentions of the parties.