Judge wrong to find ‘subject to contract’ compromise binding

Agreement: Judge applied wrong test

A judge was wrong to rule that solicitors had reached a binding compromise on a piece of litigation, when their correspondence had expressly been ‘subject to contract’, the Court of Appeal has decided.

It said that Mr Anthony Metzer QC, sitting as a deputy High Court judge, “seriously undervalued the force of the ‘subject to contract’ label on the legal effect of the negotiations”.

A dispute over a loan secured on a property in South London led to Joanne Properties Ltd issuing a claim against lender Moneything to set aside both the loan agreement and the charge.

The claim was settled except for one outstanding issue over whether there had been a binding compromise about how £140,000 that was ring-fenced from the sale of the property should be shared between the two parties.

The correspondence between their solicitors on the issue had been marked as ‘subject to contract’, but after they had appeared to reach agreement on it, Joanne changed solicitors.

Those solicitors did not confirm the draft consent order sent over by Moneything’s solicitor, who then applied to the court for an order in those terms.

Joanne new solicitors argued that there had been no binding settlement because the negotiations had been conducted ‘subject to contract’.

Mr Metzger decided that a binding contract had nonetheless been made. He found that the correspondence referred to a full and final settlement, no mention was made in correspondence of any other terms of the agreement, Joanne “subjectively thought that the dispute had been compromised”, and although there remained certain administrative matters to be agreed, they were not material for the purposes of the settlement.

Lord Justice Lewison, giving the unanimous decision of the Court of Appeal, said there was “undoubtedly no express agreement that the ‘subject to contract’ qualification should be expunged”, and found it was not necessarily implied either.

“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. Nor had there been any performance of the putative contract. All that had happened was that correspondence had been exchanged.”

He went on: “In my judgment, the judge seriously undervalued the force of the ‘subject to contract’ label on the legal effect of the negotiations.

“He also 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 the points that he mentioned went to that second question rather than to the first.”

Lewison LJ said the judge was also not referred either to the authorities of Sherbrooke v Dipple and Cohen v Nessdale Ltd, as a result of which he failed to apply the correct test.

“In my judgment, he made the same error as that of the trial judge in Sherbrooke v Dipple. Had he applied the correct test, he could not reasonably have concluded that a concluded contract had been made.

“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.”

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