Johnson v Spooner and another

Contract – Construction – Subject to contract – Claimant seeking rectification of second defendant company share register – First defendant bringing counterclaim alleging agreement with claimant to purchase her share in company – Whether first defendant proving agreement relied upon – Claim dismissed – Counterclaim allowed The second defendant company was incorporated in November 2018 as the first defendant’s vehicle for taking a short extendable lease on the George Hotel, Quay Street, Yarmouth, Isle of Wight, from the freeholder. In 2019, the claimant agreed to invest £150,000 in return for a half-share in the business but relations soon fell apart. The first defendant had been a director and the holder of one share in the company throughout. The claimant became the holder of one share on 4 March 2019. There was a hiatus in March 2020, but after re-registration her share had been transferred to the first defendant on 7 August 2020. In March 2021, the claimant applied under section 125 of the Companies Act 2006 seeking to rectify the share register of the second defendant to record her as the holder of 1 fully paid-up ordinary share, and the first defendant as the holder of the other. The first defendant counterclaimed, contending that, on 2 July 2020, by an alleged oral agreement, she had agreed to sell him her share; or that that agreement was varied by a further alleged agreement of 8 July 2020 reached in an exchange of emails which were headed “subject to contract”. Held: The claim was dismissed. The counterclaim was allowed. (1) Whether there was a binding contract between the parties and, if so, upon what terms depended upon what they had agreed. It required a consideration of what was communicated between them by words or conduct, and whether that led objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded, or the law required, as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties had not been finalised, an objective appraisal of their words and conduct might lead to the conclusion that they did not intend agreement of terms to be a precondition to a concluded and legally binding agreement: RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH [2010] UKSC 14, [2010] 1 WLR 753 applied.  The problems in the present case arose out of the parties agreeing that work should proceed before the formal written contract was executed in accordance with the parties’ common understanding. The first question concerned the effect of the parties’ understanding that the contract would “not become effective until each party has executed a counterpart and exchanged it with the other”, which never occurred. The second was, leaving aside the implications of the parties’ failure to execute and exchange any agreement in writing, whether the parties were agreed upon all the terms which they objectively regarded or the law required as essential for the formation of legally binding relations. (2) In a case where a contract was being negotiated “subject to contract” and work began before the formal contract was executed, it could not be said that there would always or even usually be a contract on terms that were agreed subject to contract. The court should not impose binding contracts on the parties which they had not reached. All would depend upon the circumstances. In order to determine whether a contract had been concluded in the course of correspondence, one first had to look to the correspondence as a whole. Even if the parties had reached agreement on all the terms of the proposed contract, they might intend that the contract should not become binding until some further condition had been fulfilled. That was the ordinary “subject to contract” case. Alternatively, they might intend that the contract should not become binding until some further term had been agreed. Conversely, the parties might intend to be bound forthwith even though there were further terms still to be agreed or some further formality to be fulfilled. If the parties failed to reach agreement on such further terms, the existing contract was not invalidated unless the failure to reach agreement on such further terms rendered the contract as a whole unworkable or void for uncertainty: Pagnan SPA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 applied. (3) Whether negotiations were continued under an express “subject to contract” banner or not, the court’s task was to determine the facts and then consider whether objectively, and taking into account that banner, there was a sufficiently determined agreement effective before being contained in writing. Although the parties might initially have intended that their oral agreement was not to be legally binding until a formal written document had been duly executed, if it could be objectively ascertained that the continuing intention of the parties changed at some point, there would be no need for a written document. Alternatively, a party might be estopped from relying on his non-execution of the document: Cheverney Consulting Ltd v Whitehead Mann Ltd [2006] EWCA Civ 1303 considered. Where the terms were agreed to be “subject to contract” or understood to be, a court would not lightly hold that the parties had waived reliance on the “subject to contract” term or understanding, although it might do so. Where all the essential or important terms had been agreed and substantial services had been rendered, a court was likely to find that there was a contract without the necessity for a formal written agreement. The fact that services had been rendered was a very relevant factor pointing in that direction. The contract would be either on the terms originally agreed “subject to contract” or those terms as varied by a subsequent agreement. But if there was neither complete agreement on important terms nor any indication that either party was resiling from the requirement that negotiations were clearly subject to contract, in the sense not only of requiring a formal document but also of nothing being binding until a written contract was signed, it was unlikely that a contract could be found: RTS and Whittle Movers Ltd v Hollywood Express Ltd [2009] EWCA Civ 1189 followed. (4) On the evidence in the present case, the claimant had agreed on 2 July 2020 to sell her share in the second defendant to the first defendant, which agreement was varied (or, if not made on 2 July, was then made) on 8 July 2020. Paul O’Doherty (instructed by Keystone Law) appeared for the claimant; Tina Kyriakides (instructed by Greenwoods GRM LLP) appeared for the first defendant; the second defendant did not appear and was not represented. Eileen O’Grady, barrister Click here to read a transcript of Johnson v Spooner and another