Court of Appeal provides useful reminder of 'subject to contract' label meaning in settlement negotiations

Facts
Settlement communications
First-instance decision
Court of Appeal decision
Comment

A Part 36 offer does not alter the status of 'subject to contract' protection in solicitors' correspondence when settling a dispute.

Facts

Joanne Properties Limited owned a building in Wandsworth. It borrowed money from Moneything Capital Limited, secured by a charge on the property. Joanne fell into arrears under the charge and Moneything appointed Law of Property Act receivers.

Joanne challenged the appointment of the receivers on the ground that both the loan agreement and the charge had been procured by undue influence. Therefore, on 20 December 2018 it issued a claim to set both aside. Joanne also claimed an injunction against the receivers preventing them from taking further steps to realise the security.

In January 2019 the parties compromised the injunction application. They agreed 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, £140,000 of the sale proceeds were to be ring-fenced and payable to either party subject to the terms on which the underlying claim was resolved. Both parties signed a formal written agreement to this effect.

The Court of Appeal considered whether a further binding agreement had been reached as to how the ring-fenced sum of £140,000 was to be shared between the parties.

Settlement communications

During the negotiations that flowed back and forth between solicitors, the correspondence was marked variously 'subject to contract' and 'without prejudice and subject to contract'.

On 19 June 2019 a formal written offer headed 'without prejudice save as to costs' was also made, believed by both sets of solicitors to be a valid Part 36 offer capable of acceptance. It was not accepted.

An agreement was apparently subsequently reached, with both parties still marking their correspondence 'subject to contract'.

Joanne's solicitor was replaced and Moneything's solicitor forwarded a consent order to the new lawyer containing numerous terms not previously discussed. When Joanne's solicitor fell silent, Moneything's solicitor issued an application for an order on the terms that he had set out. This finally prompted a reply from Joanne saying that there had been no binding settlement because negotiations had been conducted subject to contract.

First-instance decision

The first-instance judge found that despite the correspondence being marked subject to contract, an agreement had been reached, principally because the only issue in dispute was the ring-fenced £140,000. Further, a final rather than partial settlement of this issue was envisaged – albeit with certain non-material administrative matters still to be agreed.

Court of Appeal decision

The Court of Appeal allowed Joanne's appeal, holding that the first-instance judge had seriously undervalued the force of the subject to contract label on the legal effect of the negotiations.

The question of whether the parties had intended to enter into a legally binding contract is to be determined objectively, with the context being all important.

Where negotiations are expressed to be 'subject to contract' it means that neither party intends to be bound until a formal contract is made and each party reserves the right to withdraw until such a binding contract is made. That condition is carried all the way through the negotiations, unless the parties expressly agree that it should be expunged or if such an agreement was to be necessarily implied.

The Court of Appeal held that there was undoubtedly no express or implied agreement that the subject to contract qualification should be expunged in the course of negotiations between Joanne and Moneything. 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.

Moneything submitted that the effect of the purported Part 36 offer was to recalibrate the discussions between the parties which thereafter proceeded based on offers and counter-offers capable of acceptance. The Court of Appeal accepted that a Part 36 offer is not like an offer in ordinary contract law, which once rejected cannot subsequently be accepted. Unlike ordinary contractual offers, a Part 36 offer may be accepted even after the offeree has put forward a different proposal – it is in effect a free-standing offer. However, it is not a legitimate inference that making such an offer recalibrates attempts to compromise a dispute which are taking place in parallel. Even if the purported Part 36 offer did recalibrate the discussions such that they were no longer taking place beneath the subject to contract umbrella, the use of such terminology in the subsequent correspondence reinstated the subject to contract qualification.

Comment

This decision reassures lawyers that they can continue to conduct subject to contract negotiations on behalf of their clients without any undue risk of being bound by what is discussed in the course of those negotiations. The decision also serves as a useful reminder to dispute lawyers of the consent order's significance in conclusively settling negotiations which are expressed to be subject to contract; the consent order is the contract for these purposes.

For further information on this topic please contact Sean Cannon at RPC by telephone (+44 20 3060 6000) or email (sean.cannon@rpc.co.uk). The RPC website can be accessed at www.rpc.co.uk.