Real property – Subject to contract condition – Incomplete agreement – Appellant appealing against decision of deputy judge that parties made legally enforceable settlement agreement despite use of “subject to contract” in correspondence – Whether judge erring in law – Appeal allowed
The appellant owned a building in Wandsworth. It borrowed money from the respondents secured by a legal charge over the property. The appellant fell into arrears under the charge and the respondents appointed LPA receivers. The appellant brought a claim against the respondents seeking to set aside both the loan agreement and the charge.
The parties subsequently reached a compromise agreement that the property should be sold and an order made for distribution of the proceeds of sale. After payment of the costs of sale and the capital advanced under the loan agreement the sum of £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 is resolved”. The compromise was embodied in a formal written agreement.
A question arose whether the parties reached a further binding agreement about how the sum of £140,000 was to be shared between them which gave rise to an issue about the effect of the phrase “subject to contract” when used in correspondence between solicitors in the context of a settlement negotiation; and the extent to which that phrase might be disregarded by the court in holding that a binding compromise had been reached.
The judge held that the parties had reached a binding agreement, despite the use of the phrase “subject to contract”. The appellant appealed arguing that the judge was wrong to hold that a legally enforceable settlement agreement had been concluded in circumstances where the communication of both the offer and its acceptance were headed “subject to contract”.
Held: The appeal was allowed.
(1) Whether two persons intended to enter into a legally binding contract was to be determined objectively. But the context was all-important. The phrase “subject to contract” was a well-known phrase in ordinary legal parlance. The effect of those words was that the matter remained in negotiation until a formal contract was executed. That expression, when used in relation to the sale of land, meant that, although the parties had reached an agreement, no legally binding contract came into existence until the exchange of formal written contracts. It meant that neither party intended to be bound either in law or in equity unless and until a formal contract was made; and that each party reserved the right to withdraw until such time as a binding contract was made: Tiverton Estates Ltd v Wearwell [1975] Ch 146, Secretary of State for Transport v Christos [2003] EWCA Civ 1073, [2003] PLSCS 190; [2004] 1 P & CR 17 and Generator Developments Ltd v Lidl UK GmbH [2018] EWCA Civ 396; [2018] EGLR 22 followed.
(2) Once negotiations had begun “subject to contract”, in the ordinary way, that condition was carried all the way through the negotiations. Parties could get rid of the qualification of “subject to contract” only if they both expressly agreed that it should be expunged or if such an agreement was to be necessarily implied. If parties intended to enter into a legally binding agreement, a different question sometimes arose: namely whether the agreement they had reached was an incomplete agreement. Typically, that question arose where the parties agreed some of the terms (or the main terms) of a contract, but left other terms to be agreed later. However, that was a different principle from the effect of negotiations “subject to contract”. The “subject to contract” formula enabled one to see at once whether there was or was not a contract, either a contract exchanged or conveyance executed and delivered, or whether parties were in the negotiation stage: Tevanan v Norman Brett (Builders) Ltd (1972) 223 EG 1945, Sherbrooke v Dipple [1980] 2 EGLR 140 and Cohen v Nessdale Ltd [1982] 1 EGLR 160 followed.
In the present case, there was no express agreement that the “subject to contract” qualification should be expunged; nor should such an agreement be necessarily implied. The alleged offer and acceptance were each headed “without prejudice and subject to contract”. In the context of negotiations to settle litigation which were expressly made “subject to contract,” the consent order was 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.
(3) Under the ordinary law of contract, an offer which had been rejected either expressly or by a counter offer could not subsequently be accepted. A Part 36 offer was different. It could be accepted even after the offeree had made a different proposal. The offer in this case was not in fact a compliant Part 36 offer, although both parties believed that it was. In any event, even if the making of an offer had recalibrated the status of the negotiations, the fact remained that both the putative offer and the putative acceptance were each headed “subject to contract”. If the subject to contract umbrella had been lowered, those two communications raised it again. Both parties’ solicitors, as experienced solicitors, must be taken to have known what the label meant: Gibbon v Manchester City Council [2010] EWCA Civ 726; [2010] 3 EGLR 85 followed.
(4) The judge 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.
In addition, it was unfortunate that the judge had not been referred either to Sherbrooke v Dipple or Cohen v Nessdale Ltd so that he had failed to apply the correct test. Had he done so, he could not reasonably have determined that a concluded contract had been made. Where negotiations were carried out “subject to contract”, the mere fact that the parties were of one mind was not enough. There had to be a formal contract, or a clear factual basis for inferring that the parties must have intended to expunge the qualification.
Robin Kingham (instructed by BDB Pitmans LLP) appeared for the appellant; Iain MacDonald instructed by DWF Law LLP) appeared for the respondents.
Eileen O’Grady, barrister
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