The issue for the Court of Appeal was whether the parties had entered into a binding contract of compromise contained in written communications passing between their respective solicitors.
The appellant, Joanne Properties Ltd (“Joanne”) owned a building in Wandsworth. It had borrowed money from the Respondent (“Moneything”) secured by a charge over the property. Joanne fell into arrears and Moneything appointed LPA receivers. Joanne sought to challenge appointment of receivers by alleging that the underlying loan document and charge were procured by undue influence. It issued proceedings which included a claim for an injunction to prevent any furthers steps being taken to realise the security.
The parties compromised the injunction with a formal written compromise agreement, which provided for the sale of the property and distribution of the proceeds. That agreement provided that after payment of the costs of sale and the capital due under the loan agreement, the sum of £140,000 was to be ring fenced for payment of “sums that may be determined to be payable to [either party] subject to the terms on which the claim is resolved”.
The issue was whether the parties had reached a further binding contract of compromise contained in communications between their respective solicitors about how that sum of £140,000 was to be shared between them.
The initial communications between the party’s solicitors were headed “subject to contract”. There then came a written offer which was labelled “without prejudice save as to costs”. Whilst it was later accepted that this offer did not comply with Part 36, it was treated as a Part 36 offer at the time. It was not accepted, and the reply was labelled “subject to contract”.
Subsequent “subject to contract” negotiations resulted in the agreement of a figure to be paid to Moneything, with the mechanics of the payment still to be agreed. The response from Joanne, labelled “subject to contract”, said that the figure was agreed and that a proposal would be put forward to achieve the desired end.
Joanne subsequently changed solicitors before any consent order or proposal as to the mechanics of releasing the ring-fenced funds had been agreed. Joanne then took the position that there was no binding compromise because the negotiations had been conducted “subject to contract”. Moneything applied to court seeking an order that there had been a concluded agreement.
At first instance, Anthony Metzer QC sitting as a deputy High Court Judge held that there had been a concluded agreement.
The Court of Appeal disagreed, finding that the judge had seriously undervalued the force of the “subject to contract” label on the effect of the negotiations.
The Judgment reiterates that the phrase “subject to contract” is well known in ordinary legal parlance. 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.
Once negotiations had begun “subject to contract”, that condition was carried all the way through them, per Lord Denning in Sherbrooke v Dipple (1981) 41 P & CR 173.
The court emphasised that “subject to contract” negotiations remain different in principle to the question that sometimes arises when parties have entered an incomplete agreement, agreeing some terms but have left others to be agreed later.
On the particular facts of this case, in addition to the clear labelling of the communications, there was the plain contemplation that a consent order would be needed to embody the compromise. That step was never achieved.
Finally, the court disagreed that the purported Part 36 offer had recalibrated the discussions, such that they then proceeded on the basis of offers and counter-offers. Part 36 offers are not like offers in the ordinary law of contract. The rule in contract law is that where an offer has been rejected either expressly or by a counter-offer, it cannot subsequently be accepted. Part 36 offers can be accepted after the offeree has put forward a different proposal.
It is not, however, a legitimate inference that the making of a Part 36 offer recalibrates other attempts to compromise a dispute which are taking place in parallel to Part 36 offers which have been made.
“Subject to contract” negotiations are used daily by parties attempting to compromise disputes. Being ‘ordinary legal parlance’, it is perhaps surprising that the Court of Appeal was required to provide a reminder of the scope of the label and its effect on negotiations.
Nevertheless, the judgment provides a useful overview of the origins of the principle and re-affirms the very good reasons behind the “subject to contract” formula. Parties can see at once whether there is a contract, or whether they are still in the negotiation stage.
As Lord Templeman said in Tevanan v Norman Brett (Builders) Ltd (1972) 223 EG 1945, “… once one gets away from principle, then all is difficulty, and reliance on odd conversations and letters produces uncertainty in law”.