The importance of “subject to contract”

In the case of Joanne Properties Ltd v Moneything Capital Ltd and another [2020] EWCA Civ 1541, the Court of Appeal considered the use and effect of the words “subject to contract” during the course of a negotiated settlement.

Background

The appellant borrowed money from the respondent and the loan was secured by a legal charge over a property owned by the appellant. After the appellant fell into arrears, the lenders appointed receivers. The appellant challenged that appointment and issued a claim against the lenders seeking to set aside both the loan agreement and the charge. The appellant also claimed an injunction against the receivers, preventing them from taking any further steps to realise the security. The parties compromised the proceedings by agreeing that the property could be sold and an order made for distribution of the proceeds of sale. The issue then arose whether they had reached a further binding agreement about how a ring-fenced sum should be shared. The appellant contended that there had been no binding agreement between the parties, because the negotiations had been conducted ‘subject to contract’.

Decisions

At first instance, the deputy High Court Judge held that a binding contract had been made, despite the use of the phrase ‘subject to contract’ in the parties’ communications. The appellant appealed.

The appeal was allowed. The Court of Appeal held that the parties’ written communications did not establish a binding contract for settlement of the dispute. Where negotiations were stated as “subject to contract”, there could be no binding agreement until a formal contract was made, or a clear factual basis for inferring that the parties had intended to remove the “subject to contract” qualification.

Comments

This decision reiterates the importance of using the phrase “subject to contract” during negotiations. It allows the parties to conduct negotiations “subject to contract” without the risk of being bound by what is discussed in the course of those negotiations. Where negotiations to settle litigation are expressly made “subject to contract”, the consent order is the equivalent of the formal contract.