In Joanne Properties Ltd v Moneything Capital Ltd and Anor  EWCA Civ 1541, England’s Court of Appeal had to decide whether the parties had entered into a binding contract of compromise contained in written communications passing between their respective solicitors. The Court below had held that a binding contract had been made, despite the fact that the correspondence in question had been marked “subject to contract”. The Court of Appeal reversed that decision, holding that a binding contact had not been reached and that the judge below had applied the wrong test and had he applied the correct test, he could not have reasonably concluded that a binding contract had been made.
Joanne Properties Ltd (Joanne) owned a building and borrowed money from the Respondents (Moneything) secured by a legal charge over the property. Joanne fell into arrears under the charge and Moneything appointed receivers. Joanne challenged that appointment on the ground that both the loan agreement and charge had been procured by undue influence. Joanne issued a claim against Moneything seeking to set aside both the loan agreement and charge and also sought an injunction against the receivers preventing them from taking any further steps to realise the security.
The parties compromised the application for an injunction and agreed that the property should be sold and an order made for distribution of the sale proceeds. After payment of the costs of sale and capital advanced under the loan agreement, £140,000 was to be ring-fenced, representing sums that may be determined to be payable to either party, subject to the terms on which the claim was resolved; and any balance was to be ring-fenced for the resolution of a dispute relating to another charge over the property in favour of a third party. The agreement was embodied in a formal written agreement signed by each party.
Issue on appeal
The issue on appeal was whether the parties had reached a further binding agreement about how the sum of £140,000 was to be shared between them.
Both parties were represented by solicitors and in correspondence between them containing proposals about how the sum of £140,000 was to be shared, both solicitors marked their letters “Subject to Contract” or “Without Prejudice and Subject to Contract”. This correspondence culminated in Moneything’s solicitors sending a letter (marked “subject to contract”) to Joanne’s solicitors enclosing a consent order, which contained a number of terms not previously discussed. Moneything’s solicitors subsequently emailed Joanne’s solicitors asking if they had any comments on the draft order, followed by a letter, saying that unless the draft consent order was agreed by a specified date, Moneything would apply to court for an order in those terms, which it did. In response, Joanne’s solicitors asserted that there had been no binding settlement because the negotiations had been conducted "subject to contract".
The Court of Appeal referred to the applicable principles as follows:
Court of Appeal Ruling
The Appeal Court held that there was undoubtedly no express agreement that the "subject to contract" qualification should be expunged and that such an agreement could not be necessarily implied. It said the alleged offer and acceptance were each headed "without prejudice and subject to contract" and that it was also plainly contemplated that a consent order would be needed in order to embody the compromise, just as the earlier settlement agreement had been embodied in a formal signed contact. In the context of negotiations to settle litigation which are expressly made "subject to contract," the consent order is the equivalent of the formal contract. Nor had there been any performance of the putative contract. All that had happened was that correspondence had been exchanged.
The Appeal Court said that the judge below had seriously undervalued the force of the "subject to contract" label on the legal effect of the negotiations. He also failed to separate the two distinct questions (a) whether the parties intended to enter into a legally binding arrangement at all and (b) whether the agreed terms were sufficiently complete to amount to an enforceable contract. Almost all the points that he mentioned went to that second question, rather than to the first. In addition, the judge had failed to apply the correct test and had he applied the correct test, he could not reasonably have concluded that a concluded contract had been made. As the cases show, where negotiations are carried out "subject to contract", the mere fact that the parties are of one mind is 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.
This case usefully restates the principles applicable to negotiations conducted “subject to contract” and is a reminder that once negotiations have begun "subject to contract", that condition is carried all the way through the negotiations and parties can only get rid of the qualification of “subject to contract” if they both expressly agree that it should be expunged or if such an agreement can be implied. Whether parties agreed to enter into a binding contract, waiving reliance on the "subject to [written] contract" term or understanding will depend upon all the circumstances of the case, although the cases show that the court will not lightly so hold.
Readers who are interested in this area of law may also see the Hong Kong judgment in Carrier Hong Kong Ltd v Dickson Construction Co Ltd  HKEC 1581, a case handled by Deacons, where the arbitrator and the Court upheld a contract even though the phrase “subject to contract” had been used in some of Carrier’s letters.