Court of Appeal finds no binding settlement reached, emphasising importance of "subject to contract" label

In a recent decision, the Court of Appeal has overturned a deputy judge's decision that a binding settlement agreement had been reached in inter-solicitor correspondence despite the use of the "subject to contract" label: Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541.

The decision illustrates that, once parties have started to negotiate "subject to contract", the court will not conclude that they have dispensed with that proviso unless they have agreed to do so expressly or that is the necessary implication of their words or conduct. It also suggests that, while a Part 36 offer must be one that is capable of acceptance (and so not "subject to contract"), the making of a Part 36 offer will not ordinarily be taken to "recalibrate" the status of without prejudice negotiations that are taking place in parallel.

For more information on the requirements for a binding contract, and the effect of negotiating "subject to contract", see the first edition of our contract disputes practical guides series When do you have a binding contract? It may be more (or less) often than you think (or click here to access the whole series).

Background

The parties had agreed a settlement of legal proceedings relating to a loan agreement secured by a legal charge over the claimant's property in Wandsworth. Under that settlement, which was embodied in a formal signed agreement, they agreed that the property should be sold and, after payment of the costs of sale and the capital advanced under the loan agreement, the sum of £140,00 was to be ring-fenced pending resolution of the question of how it should be allocated between the parties.

The question in this appeal was whether a further binding agreement was reached in inter-solicitor correspondence as to how the £140,000 was to be allocated. The key chronology was as follows:

• The defendant's solicitor put forward offers by email and in a telephone call in May / June 2019, on each occasion stating that the offers were made "subject to contract".
• On 19 June, the defendant's solicitor made a more formal written offer headed "without prejudice save as to costs", but not "subject to contract". At that time, both parties' solicitors interpreted the offer as an offer under CPR Part 36, though it was subsequently accepted that it was not a valid Part 36 offer.
• The claimant's solicitor put forward further offers by email headed "without prejudice and subject to contract", as well as an offer in a telephone conversation on 11 July. The defendant's solicitor's attendance note recorded that this was a "firm offer with instructions from [the claimant] ... and if accepted, that was the matter concluded...".
• Later on 11 July, the defendant's solicitor put forward an offer by email headed "without prejudice and subject to contract." This offer was to accept £75,000 from the ring-fenced sum, "mechanics and terms to be agreed."
• The claimant's solicitor replied the same day in an email also headed "without prejudice and subject to contract". The reply began with the word "Agreed" and said he would liaise with counsel and "put a proposal to you to achieve the desired end."
• On 24 July, the defendant's solicitor wrote to the claimant's solicitor with a draft consent order containing additional terms. The letter was headed "subject to contract".
• The draft order was not agreed and the defendant applied to court for an order in those terms. The claimant's position was that no binding agreement had been reached.
• The High Court found that a binding agreement had been reached. The claimant appealed.

Decision

The Court of Appeal allowed the appeal. Lewison LJ gave the leading judgment with which Rose and Stuart-Smith LJJ agreed.

As Lewison LJ noted, whether parties intend to enter into a legally binding contract must be determined objectively, but the context is all-important. In this case the most important feature of the context was the use of the phrase "subject to contract". In his own previous decision in Generator Developments Ltd v Lidl UK GmbH [2018] EWCA Civ 396, Lewison LJ stated:

"The meaning of that phrase is well-known. What it means is that (a) neither party intends to be bound either in law or in equity unless and until a formal contract is made; and (b) that each party reserves the right to withdraw until such time as a binding contract is made."

Once negotiations have begun "subject to contract", that condition is carried all the way through the negotiations unless the parties have agreed to the contrary either expressly or by necessary implication (as for example the Supreme Court found was the case in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14, not least because the contract had been partly performed).

In the present case, there was no express agreement that the "subject to contract" qualification should be expunged, and Lewison LJ found that no such agreement was to be necessarily implied. The alleged offer and acceptance on 11 July were each headed "without prejudice and subject to contract". The letter of 24 July was similarly headed and also plainly contemplated that a consent order would be needed to embody the compromise. As Lewison LJ commented, in the context of negotiations to settle litigation which are expressly made "subject to contract," the consent order is the equivalent of the formal contract.

The defendant argued that the purported Part 36 offer on 19 June had "recalibrated" the discussions so that thereafter they proceeded on the basis of offers and counter-offers capable of acceptance. Lewison LJ rejected that argument, saying that a Part 36 offer is not like an ordinary contractual offer, in particular in that it survives rejection and the making of counter-offers. It is therefore not legitimate to infer that the making of a Part 36 offer recalibrates without prejudice negotiations which are taking place in parallel.

In any event, even if the Part 36 offer had had the effect of lowering the "subject to contract" umbrella, the putative offer and acceptance were each headed "subject to contract" and so had raised it again.

The judge's conclusion that a binding settlement was reached had "seriously undervalued" the force of the "subject to contract" label on the legal effect of the negotiations.