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25 November 2020

Success for BDB Pitmans as Court of Appeal gives guidance on ‘subject to contract’ effect in settlement discussions

Phil Smith, Partner and Sophie Austin, Associate in BDB Pitmans’ commercial litigation team have had a successful outcome in the Court of Appeal in the case of Joanne Properties Limited v Moneything Capital Limited and Another.

Acting for Joanne Properties Limited, the appeal raised an issue about the effect of the label ‘subject to contract’ when used in correspondence between solicitors in the context of a settlement negotiation, and the extent to which that label may be disregarded by the court in holding that a binding compromise has been reached.

Case background

In December 2019, the Respondents, Moneything Capital Limited and Moneything (Security Trustee) Limited, applied to the Queen’s Bench Division for an order that a claim made against them by Joanne Properties Limited had been settled. Mr Anthony Metzer QC (sitting as a Deputy High Court Judge) held that the parties had reached a concluded agreement and the claim was stayed on the terms of a consent order. Joanne Properties Limited appealed the decision, submitting that the deputy 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’, undermining a long-established principle of the common law.

The Court of Appeal held that the judge below seriously undervalued the force of the ‘subject to contract’ label on the legal effect of the negotiations and 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 of his reasons pointed to the second question rather than the first. Lord Justice Lewison held that, had Mr Metzer QC applied the correct test, he could not reasonably have concluded that a concluded contract had been made, explaining:

‘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.’

Key takeaways

The decision reiterates the principle that once negotiations have begun ‘subject to contract’ that condition is carried all the way through the negotiations unless the parties agree that it should be expunged.

It serves as a reminder to solicitors conducting negotiations to carefully consider the manner in which communications are headed and their consequences.

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