Although most people know the term ‘subject to contract’ from property transactions, it is by no means limited to them and should not be overlooked in any contract negotiations, particularly those over the settlement of claims.
The term is used to show that a party does not intend to enter into an agreement at that point but will do so in a separate, signed, document and protects a party from being bound by terms until its ready to do so when all of a deal’s terms have been agreed.
The significance of these three words has been highlighted by two recent cases involving settlements that led to very different outcomes.
Evans v Trebuchet Design Ltd
Peter Evans created a free annual yacht guide and alleged that Trebuchet had infringed his copyright when it re-coloured his artworks after taking responsibility for designing the guide following Mr Evans’ retirement.
Trebuchet sent Mr Evans a letter marked ‘WITHOUT PREJUDICE SAVE AS TO COSTS’ in which it offered to pay him £3,000 in full and final settlement of his claim. Mr Evans emailed to accept the offer and sent an invoice for the £3,000.
The following month Trebuchet sent Mr Evans a standard form settlement agreement which included additional terms, notably a confidentiality clause that Mr Evans refused to sign.
Mr Evans subsequently pursued his claim but lost when the court held that as Trebuchet’s initial offer was not marked ‘subject to contract’ it was an offer capable of acceptance it its own right which Mr Evans had accepted with his email and thereby concluded a binding settlement agreement.
Joanne Properties Ltd v Moneything Capital Ltd and another
A month after the IPEC’s decision in Evans the Court of Appeal was asked to rule on the enforceability of another settlement agreement, this time one that had been negotiated with some correspondence marked ‘subject to contract’.
After it had fallen into arrears on a loan from Moneything, Joanne applied to set aside the loan agreement as well as a charge it had given over a property to secure the loan. Terms to settle that claim were agreed and provided for the property to be sold, but issues arose over whether the parties had reached a further agreement as to how the proceeds of sale would be distributed.
The ‘subject to contract’ label was used during protracted negotiations, but the High Court found that a binding contract was nonetheless made.
Joanne appealed and the Court of Appeal found that the High Court had “seriously undervalued’ the impact of the ‘subject to contract’ wording on the negotiations.
Lord Justice Lewison (author of a leading textbook on interpreting contracts) gave the appeal court’s judgment and highlighted one of his previous decisions in which he held that ‘subject to contract’ meant 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.”
He also placed emphasis on two important points that the judge at first instance had not been referred to. First, once negotiations have begun on a ‘subject to contract’ basis, that condition is “carried all the way through negotiations”, and secondly, that “the parties could get rid of the qualification of 'subject to contract' only if they both expressly agreed that it should be expunged or if such an agreement was to be necessarily implied”.
As correspondence had been marked ‘subject to contract’ and there had been no agreement to ‘get rid’ of that basis for negotiations, the court allowed the appeal and held that no agreement about the distribution of the sale’s proceeds had been made and neither party was bound by the positions they had put forward in their negotiations.
Both cases highlight the importance of the ‘subject to contract’ label and show that it has real force which should be used to protect your position during any kind of negotiation. They also demonstrate the potential pitfalls of overlooking or misunderstanding commonly used phrases because they’re ‘standard wording’ which, we often hear, “probably doesn’t mean anything”’. As Joanne in particular shows, three little words can have a massive impact.