When does “subject to contract” move to a binding agreement?

This article is written by Judith Hopper and Alex Horan.

In the recent case of Baltimore Wharf SLP v Ballymore Properties Limited v WSP UK Limited, the Technology and Construction Court (“TCC”) examined the extent to which a binding settlement of an underlying construction dispute was reached following a 'subject to contract' reservation contained within a draft settlement agreement. 

Background

On 15 July 2023, the roof of a nursery collapsed at Baltimore Wharf, a residential development, in London.   The landlord, Baltimore Wharf SLP (“Baltimore”), subsequently brought a claim against the developer, Ballymore Properties Ltd (“Ballymore”), pursuant to a collateral warranty dated 7 January 2013.  

Ballymore subsequently filed a defence against the claim while also lodging a ‘part 20’ claim against WSP UK Limited (“WSP”).

The parties entered into settlement negotiations between July and September 2024 during a stay in proceedings. The settlement negotiations were labelled as ‘subject to contract’.

On 29 August 2024, Ballymore’s solicitors circulated a draft Settlement Agreement marked "Subject to contract and without prejudice save as to costs". Following minor amendments by WSP’s and Ballymore solicitors, on 24 September 2024 Ballymore’s solicitors subsequently asked Baltimore’s solicitors if the settlement agreement was “agreed”. Baltimore’s solicitor responded: “I confirm that the settlement agreement with WSP’s amends is agreed”. 

An execution version of the Settlement Agreement was subsequently circulated for signature, which was not labelled subject to contract. Ballymore and WSP subsequently signed the Settlement Agreement; Baltimore, however, did not. 

Ballymore and WSP applied for summary judgment, asserting that the agreement on 24 September 2024 constituted a legally binding settlement and contending that the “subject to contract” restriction had been “necessarily implied” to be removed on the basis that the terms were settled. 

Judgment

The TCC noted that it was common ground that the terms of the draft Settlement Agreement were agreed on 24 September 2024. The question before the Court was whether the conduct of the parties, including the emails, was sufficient to imply that the “subject to contract” umbrella had either been expressly waived, or that its removal must necessarily be implied from the parties’ conduct. The Court noted that the threshold for establishing such agreement or implication is a high one.

In the present case, the TCC found that there had been no conduct by Baltimore amounting to an implied removal of the subject to contract reservation. The Judge found that the Claimant's email accepting the terms was insufficient to imply such a removal and noted that the draft agreement referred to on 24 September 2024 contained the words "Subject to contract" on every page. Accordingly, the negotiations remained subject to contract and no binding agreement had been formed.

The TCC referred to the earlier judgment of Sherbrooke v. Dipple [1981] 41 P&CR and this formulation of the principle: 

“It is always the case that in "Subject to Contract" negotiations one side or both from time to time speak as though there was a contract or would be a contract and that is because everybody looks on the bright side and thinks a sale is going to take place. The fact of the matter is that for very good reasons the "Subject to contract" formula enables one to see at once whether there is or is not a contract, either a contract exchanged or conveyance executed and delivered or whether the parties are in the negotiation stage. Once one gets away from principle then all this difficulty and reliance on odd conversations and letters produces uncertainty in law."

Key takeaways

• The decision reinforces the strength of the “subject to contract” reservation in settlement negotiations and practically serves as a reminder that agreement on the substantive terms of a settlement will not, without more, give rise to a binding contract where negotiations remain subject to contract.
• If parties intend to be bound before signature, they should clarify that the subject-to-contract limitation no longer applies. Until then, parties may retain the ability to withdraw from negotiations even where terms appear to have been agreed in principle. The Court requires certainty before it will enforce the terms of a Settlement Agreement. 

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