The "subject to contract" label

The Court of Appeal has provided helpful guidance on the effect of the words ‘subject to contract’ in the context of negotiations, with LJ Lewison’s judgment in Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541 setting out the existing case law on the use of the term.

A dispute had arisen between Joanne Properties and Moneything over a loan agreement and an accompanying charge over a property. In a written agreement, the parties agreed the property should be sold and certain proceeds ring-fenced.

The parties’ solicitors had exchanged written communications negotiating how the ring-fenced sum of £140,000 should be shared. These communications were stated to be ‘subject to contract’. Moneything’s solicitor proposed that £75,000 should be released to Moneything, which was agreed by Joanne Properties’s solicitor. Before a consent order or any payment mechanics had been agreed, Joanne Properties changed solicitor. Joanne Properties’s position was that no binding agreement had been reached, as the negotiations were subject to contract. Moneything applied to the Court for an order that there had been an agreement on the terms of the consent order. At first instance, the judge found that, despite the use of the term ‘subject to contract’, a binding contract had been made.

LJ Lewison, with whom LJJ Rose and Stuart-Smith agreed, found that the judge had “seriously undervalued the force of the ‘subject to contract’ label on the legal effect of negotiations” and that no binding contract had been made.

The judgment sets out the existing case law:

• Once applied, the ‘subject to contract’ label is carried through the negotiations (Sherbrooke v Dipple (1981) 41 P&CR 173); and
•  The ‘subject to contract’ label is only removed if the parties expressly agree so, or it necessary that such an agreement is implied (Tevanan v Norman Brett (Builders) Ltd (1972) 223 EG 1945.

It was not sufficient that the potential wording of an agreement was settled. As LJ Templeman set out in Tevanan, while parties may be as to one mind of the potential route towards agreement, this does not negate their original intention that no formal contract exists until contracts have been exchanged. The ‘subject to contract’ formula “enables one to see at once whether there is or is not a contract—either a contract exchanged or conveyance executed and delivered—or whether parties are in the negotiation stage. Once one gets away from principle, then all is difficulty, and reliance on odd conversations and letters produces uncertainty in law."

LJ Lewison’s judgment is not only a helpful overview of ‘subject to contract’, but also of the various authorities regarding when it may be necessary for the Court to imply that an agreement has been reached to remove the ‘subject to contract’ label, such as when work has begun during negotiations. In addition, the judgment contains detailed obiter comments on the effect, or lack thereof, of a Part 36 offer on a ‘subject to contract’ label.