Developments in the law relating to ‘subject to contract’ correspondence

In property negotiations, it is usual practice for the solicitors on either side to mark the correspondence ‘subject to contract / contract denied’, and to end each letter with a formula such as: “No contract or agreement shall exist at law until such time as same have been executed and the contract deposit paid. Furthermore, neither this nor any other correspondence shall be deemed a note or memorandum for the purpose of the Statute of Frauds.”

As held by the Supreme Court in Boyle v. Lee [1992] 1 IR 555, such a formula should protect the parties from contractual liability until such time as a formal contract has been executed.

Two recent cases have shown that, where the contract in question is part of a wider negotiation or ‘package’, equity may intervene if one party acts unconscionably in seeking to rely on the ‘subject to contract’ formulation.

In Prunty v. Crowley [2016] IEHC 293 (High Court, O'Malley J, 30 May 2016), a landowner entered into a contract with a property developer to sell a piece of land. The developer failed to complete, and specific performance proceedings were issued. The developer’s former business partner then entered into negotiations with the landowner. In a letter marked ‘subject to contract’, he stated that, if the specific performance proceedings were discontinued, he would discharge the balance monies and complete the transaction.

The landowner discontinued the proceedings, but the former business partner failed to complete the transaction as he had promised to do. In the consequent specific performance proceedings, Ms Justice O’Malley held that the landowner had acted to his detriment in abandoning his action against the developer, saying:

“Despite the “subject to contract” formulation, this letter is in my view an unequivocal inducement to the plaintiff to surrender his claim against [the developer] on the basis that, once he did so, he could have the €99,000. That, in my view, could only be seen as amounting to an implicit promise that the contract with [the former business partner] would proceed and that the “subject to contract” phrase would not be relied upon.”

In JLT Financial Services Ltd v. Gannon [2017] IESC 70 (Supreme Court, O'Malley J, 21 November 2017), the owners of two neighbouring properties needed to expand their businesses. The first landowner agreed to purchase the neighbouring property. The second landowner agreed to take a lease of land elsewhere belonging to the first landowner. The relevant correspondence was marked ‘subject to contract’, and there was no formal note or memorandum. After some delays, the second landowner concluded the lease of the other property, and entered into occupation. Shortly thereafter, the first landowner notified the second landowner that it was terminating negotiations concerning the purchase of the neighbouring property.

In the High Court (Liberty Asset Management Ltd v. Gannon [2009] IEHC 468), Ms Justice Laffoy held, inter alia, that there had been part performance of the contract, and that it would be “unconscionable and a breach of good faith” to allow the first landowner to rely on the Statute of Frauds to avoid its contractual liability.

In the Supreme Court, Ms Justice O’Malley affirmed the decision, holding that the High Court decision had been based on the finding that the two agreements amounted to a ‘package’, and that there was nothing to indicate an agreement to separate them.

Accordingly, the ‘subject to contract’ formulation may not protect a party:

a) If the relevant letter amounts to an ‘unequivocal inducement’ for the other party to act to its detriment and is relied upon as such; or

b) If the correspondence concerns more than one agreement, such that it would be unconscionable or a breach of good faith to rely on the ‘subject to contract’ letter in order to avoid contractual liability.

(This piece was originally published in Law Ireland in January 2019.)