No “curate’s egg” approach to terms in a subject to contract document (Court of Appeal)

Farrar v Rylatt [2019] EWCA Civ 1864

The question

Can the “subject to contract” principle apply to certain terms within a document only (rather than the whole document)?

The key takeaway

Documents which are marked “subject to contract” are usually not legally binding. The Court of Appeal has ruled that this principle applies to a document in its entirety and it cannot be claimed that it applies to some parts of a document, but not others (unless the document itself says so).

The background

The appellants were a builder and his construction company. The appellants sought declarations that there were two legally binding profit sharing agreements relating to two of the appellants’ property developments. In relation to one of the developments (named The Barns), the appellants alleged that the valid profit sharing agreement arose from a heads of terms document, which had been annexed to a building contract.

However, the heads of terms document had not been signed and was marked “subject to contract and without prejudice”. The document further provided that the first appellant “will enter” into a joint venture partnership with the respondents in relation to the property development. The net proceeds were to be divided 50:50 between the first appellant and the respondents. 

The heads of terms document covered other high-level issues (rather than detached matters) such as:

• timetable for exchanging contracts for the sale of land;
• the appellant’s obligations as the seller; and
• a proposal for a joint venture and principles for profit sharing. 

The parties also entered into subsequent contracts for the sale of the land and for building works. However, none of the subsequent contracts was entered into for the joint venture or profit sharing purposes.

At the trial, the Judge decided that no legally binding profit sharing agreement arose from the heads of terms. This was not only because of the “subject to contract” label at the top of the document, but also because the heads of terms document was not signed among other things.

The decision

The Court of Appeal criticised the trial judgment, stating that it “is not as clear as it might be on important issues of fact and law”. However, despite this, it upheld the Judge’s finding that the heads of terms document was not legally binding. 

In reaching a decision that the heads of terms document was accurately labelled “subject to contract”, the Court of Appeal drew particular attention to the following factors:

• the wording of the heads of terms showed that the parties were not yet ready to agree the terms of a contract;
• information was still outstanding and that it was the intention that a further future contract would be entered into;
• the two respondents who were named as a party to the heads of terms were in another country on the date of the document;
• the two respondents named in the heads of terms document did not eventually buy the land, as intended in the document (the third respondent, a corporate entity, did). 

The Court of Appeal further stated that the “subject to contract” principle could not apply partially, rather than entirely, to documents. For example, clauses in a document marked “subject to contract” are not legally binding unless the document specifically states that certain clauses are exempt from the label “subject to contract”.

Why is this important?

The fact that the “subject to contract” principle cannot be applied partially within documents (unless the document itself states otherwise) is not surprising. However, this Court of Appeal decision provides an authoritative statement of the law, which businesses will find helpful. 

Any practical tips? 

You should always ensure that your intentions are clearly and accurately reflected in documents. If you intend for certain clauses in a “subject to contract” document to be binding (eg confidentiality, costs or governing law/jurisdiction), ensure that this is expressly stated in the document.