Legal effect of the “under contract” reiterated by the Court of Appeal

In the recent case, Joanne Properties Ltd v Moneything Capital Limited and Moneything (Security Trustee) Limited, the English Court of Appeal reiterated the force of the qualification “subject to contract” on the legal effect of negotiations. The Court confirmed that when the qualification “subject to contract” is used, in order not to apply the qualification, there must be a formal contract concluded or a clear factual basis for inferring that all parties intended not to apply the qualification. not apply it.

Fund

Joanne Properties Ltd (“Joanne”) borrowed a loan from Moneything Captial Limited (“Moneything”) secured by a legal charge on property owned by Joanne. Joanne then fell into arrears on the loan, which led Moneything to appoint LPA receivers. Following an initial dispute in which Joanne sought to rescind both the loan agreement and the charge for undue influence, the parties reached a formal written compromise agreement. They agreed that (a) the property should be sold and the proceeds divided among them; and (b) after payment of the sales charges and repayment of the advanced loan, an amount of £ 140,000 has been set aside for payment of “amounts which can be determined to be due to [either party] and subject to the conditions under which the claim is resolved”. The legal question in the appeal case was whether the parties had reached another binding agreement on how the £ 140,000 was to be divided between them. Subsequent communications with the proposals between counsel for the parties were declared “subject to contract”. The Court of Appeal concluded that no binding contract had been entered into.

The decision of the Court of Appeal

The test for determining whether the parties have entered into a binding contract is an objective test. The use of the qualification “subject to contract” during negotiations, in communications or letters of offer is part of the context to be taken into account when applying the objective test.

The meaning of the phrase “subject to contract” has been defined in various decisions of the English courts and in effect means that the matter remains under negotiation until a formal contract is concluded.

It is important to note that the Court of Appeal noted that once negotiations have started “subject to the contract”, then regardless of whether this expression is used consistently in all communications, the starting position must be that the object of the qualification of the contract prevails throughout the negotiations. This position can be rebutted only when the parties expressly agree that the qualification should be deleted or when it can be inferred, on a clear factual basis, that the parties have so agreed.

This case is a reminder that in practice, it is important to carefully document negotiations and agreements to clearly record the intentions of the parties.

Alice P. Darby