In a recent decision, Joanne Properties Ltd v Moneything Capital Ltd, the Court of Appeal has provided helpful guidance confirming that where negotiations are ‘subject to contract’, there will be no legally binding agreement unless: (i) a formal contract is entered into; or (ii) the facts show that the parties clearly intended to remove the ‘subject to contract’ qualification.
‘Subject to contract’ is a useful label which is usually understood to mean that the parties are still negotiating and have not yet reached a final, binding agreement. It helps parties to see at once whether there is a binding contract, or whether they are still in the negotiation stage. However, parties should bear in mind that although the ‘subject to contract’ label does help rebut a presumption of intention to create contractual relations (a key element for the formation of a contract), it is not definitive. When considering whether an agreement is legally binding, the court will assess all the facts and ask whether a reasonable person would regard it as such (an objective test).
The key takeaways are that, when negotiating a settlement:
The appellant, Joanne Properties Ltd (“JPL”) and the respondents, Moneything Capital Ltd (“MCL”), had entered into a financing agreement which was secured over a property in Wandsworth. A dispute arose between the parties which resulted in JPL issuing proceedings against MCL. As an interim measure, the parties agreed that the Wandsworth property should be sold and, after payment of costs and the capital due under the loan agreement, the sum of £140,000 should be paid into a ring-fenced account.
The parties’ solicitors then entered into negotiations to attempt to agree how the ring-fenced sum should be divided between the parties. During those negotiations:
MCL applied to court for an order that there had been a concluded agreement between the parties. JPL’s position was that there was no binding settlement because the negotiations had been conducted ‘subject to contract’.
At first instance, the High Court held that there was a binding agreement between the parties. JPL appealed that decision.
Allowing JPL’s appeal, the Court of Appeal found that the first instance judge’s conclusion that a binding agreement had been reached “seriously undervalued” the force of the ‘subject to contract’ label on the legal status of the negotiations.
Lewison LJ (giving the leading judgment) made clear that whether parties intend to enter into a legally binding contract must be determined objectively, but the context is all-important. In this case the most important feature of the context was the use of the phrase ‘subject to contract’.
The judge went on to say that ‘subject to contract’ is a well-known phrase in ordinary legal parlance and means that:
Once negotiations have begun ‘subject to contract’ (as they did between JPL’s and MCL’s solicitors), that condition “is carried all the way through the negotiations” unless the parties have expressly agreed otherwise (or if such agreement can be necessarily implied).
In this case, there was no agreement (either express or implied) that the ‘subject to contract’ condition should be removed. Both MCL’s offer and JPL’s acceptance on 11 July 2019 were labelled ‘without prejudice and subject to contract’, as was MCL’s letter of 24 July 2019. Furthermore, it was clearly contemplated that a consent order – the “equivalent of the formal contract” in the context of negotiations to settle litigation – would be needed. JPL had refused to sign the consent order; there was therefore no binding agreement.
If you require further information about anything covered in this briefing, please contact Ben Longworth, Lucy Penn, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2020
Ben is an experienced commercial litigator who advises businesses and high net worth individuals on resolving a wide range of complex contentious matters.
Ben is an experienced commercial litigator who advises businesses and high net worth individuals on resolving a wide range of complex contentious matters.
Lucy is a senior associate in the Disputes team. She acts for both claimants and defendants, and advises on all stages of the litigation process from pre-action through to trial. She assists with settlement options where appropriate in order to achieve the most desirable and commercial outcome for clients. Lucy provides advice on a broad range of contentious matters including civil fraud, contractual disputes and professional negligence. She has a particular interest in disputes regarding intellectual property, outsourcing and technology, and is a member of the firm’s Data, IP and Technology Disputes team. Recent experience includes acting for a software supplier in a dispute over the installation of a compliance management system, and advising a US company in relation to the sale of unlicensed software by an ex-employee. Lucy qualified as a solicitor in 2018.
Lucy is a senior associate in the Disputes team. She acts for both claimants and defendants, and advises on all stages of the litigation process from pre-action through to trial. She assists with settlement options where appropriate in order to achieve the most desirable and commercial outcome for clients. Lucy provides advice on a broad range of contentious matters including civil fraud, contractual disputes and professional negligence. She has a particular interest in disputes regarding intellectual property, outsourcing and technology, and is a member of the firm’s Data, IP and Technology Disputes team. Recent experience includes acting for a software supplier in a dispute over the installation of a compliance management system, and advising a US company in relation to the sale of unlicensed software by an ex-employee. Lucy qualified as a solicitor in 2018.
Ben Longworth, Partner Email Ben +44 (0)20 3375 7195
Lucy Billett, Senior Associate Email Lucy +44 (0)20 3375 7812
