Joanne Properties Ltd v Moneything Capital Ltd – “Subject to Contract”

The recent decision of the Court of Appeal in Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541 is an important reminder of the principles of “subject to contract” and the issue of when a contract becomes binding.

Background

Joanne Properties Ltd (JP) were the owners of a property in Wandsworth. They borrowed from Moneything Capital Ltd (MC). This loan was secured by a legal charge. JP fell into arrears and LPA receivers were appointed. JL disputed the appointed. They issued proceedings to injunct ML from enforcing the security.

The injunction proceedings were compromised. The parties agreed the property should be sold and the proceeds distributed. The compromise said that £140,000 should be ring-fenced. This represented “sums that may be determined to be payable to [either party] subject to the terms on which the claim is resolved.”

The question before the Court of Appeal was whether the parties had reached a binding agreement on how to share the £140,000 between them.

In the course of communications between the party’s solicitors, MC had introduced correspondence as “subject to contract”, before emailing a formal offer on a “without prejudice save as to costs basis”. This offer was not accepted.

An offer from JP’s solicitors was headed “without prejudice and subject to contract”. Further correspondence was conducted on a “subject to contract” basis before the parties reached a figure payable to MC (albeit no mechanics of the payment were agreed).

JP instructed new solicitors before the mechanics for the payment were agreed or the proposals concluded in a consent order. JP argued that any agreement was not binding. It had been “subject to contract” and no contract was concluded. MC disagreed and sought to enforce what they considered to be a concluded agreement.

Subject to contract

In his judgment, Lewison LJ highlighted the importance of the “subject to contract” doctrine and explored how the courts have dealt with this in the past.

He noted that in Tiverton Estates Ltd v Wearwell [1975] Ch 146, Denning MR had stated “…for over a hundred years, the courts have held that the effect of the words “subject to contract” is that the matter remains in negotiations until a formal contract is executed”.

This principle has persisted. In Secretary of State for Transport v Christos [2003] EWCA Civ 1073 Mummery LJ confirmed: “… that expression [subject to contract] when used in relation to the sale of land, 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”.

The principle does not just apply to contracts for the sale of land. It applies to negotiations about any form of agreement.

Goodwood Investments Holdings Inc v Thyssenkrupp Industrial Solutions AG [2018] EWHC 1056 (Comm) reiterated that subject to contract negotiations applied when determining whether an arbitration claim had settled. Likewise, RTS Flexible Systems Ltd v Molkerei Alois Muller Gmb & Co KG [2010] UKSC 14 held it applied to contracts for the supply and design of machinery.

As to the scope of subject to contract negotiations, Lewison LJ addressed this as well. He noted that once subject to contract negotiations begin, the subject to contract stipulation is carried on throughout the negotiations until the conclusion. He explained that in Sherbrooke v Dipple (1981) 41 P & CR 173, Denning MR’s said “… the opening letter was “subject to contract”. All the subsequent negotiations were subject to that overriding initial condition”.

And while Lewison LJ acknowledged that parties could end the “subject to contract” stipulation, this could only happen where “both expressly agreed that it should be expunged or if such agreement was necessarily implied”.

Implying the end of subject to contract negotiations is no easy feat. The Supreme Court considered this in RTS Flexible Systems Ltd. Where Lord Clarke said:

… in a case where a contract is being negotiated subject to contract and work begins before the formal contract is executed, it cannot be said that there will always be or even usually be a contract on the terms that were agreed subject to contract. That would be too simplistic and dogmatic an approach. The Court should not impose binding contracts on the parties which they have not reached. All will depend on the circumstances”.

The decision

Unsurprisingly, the Court of Appeal held that the negotiations here were subject to contract and as such no express agreement had been reached.

Could an agreement be implied? No. The documents relied on for offer and acceptance were marked “without prejudice and subject to contract”. The parties had contemplated a consent order was required to settle the litigation (which would be the litigation equivalent of a formal contract).

The “agreement” had not been performed. No agreement could be implied. The negotiations were “subject to contract”. There was no agreement.

What does this mean?

The case is a useful reminder of a number of principles.

Firstly, subject to contract as a principle is there for a good reason. It allows parties to understand whether they are negotiating or whether an agreement has been reached.

Secondly, subject to contract negotiations will continue to be regarded as subject to contract until the matter is resolved. It need not be on every communication; the negotiations continue on this basis. But as a matter of good practice, and to avoid any misunderstandings, ensure it is written on all correspondence you send that is “subject to contract”.

Finally, the fact that one party considers matters resolved will not be enough – there must either be a formal contract or a clear basis for inferring that the parties have intended to waive the subject to contract principle.